CITGO Petroleum Corporation History

Company Perspectives:

These Core Values are a part of every decision CITGO makes. Adherence to each of these Values will build PDVSA's trust and confidence: Safe and environmentally sound operations; Results-oriented individual and team performance; Mutually beneficial relationships with our customers and suppliers; Trust and respect among our employees; Ethical and legal business conduct; Honest and open communications, internally and externally, leading to diversity of ideas, building of consensus and dedication to the chosen course of action; Good corporate citizenship Key Dates:

Key Dates:

1910:

Henry L. Doherty establishes Cities Service Company, which supplied gas and electric utility services.

1915:

Cities Service founds Empire Gas & Fuel, a subsidiary devoted to oil exploration.

1930:

The company begins to market petroleum products through retail outlets.

1931:

Cities Service completes the first long-distance, high-pressure natural gas pipeline system in the United States.

1958:

With all utility assets sold, Cities Services focuses on oil and gas activities.

1965:

Cities Service changes its brand name to CITGO.

1983:

CITGO Petroleum Corporation, the refining, marketing, and transportation arm of Cities Service, is incorporated as a wholly owned subsidiary.

1983:

The Southland Corporation purchases CITGO.

1986:

Petróleos de Venezuela, S.A., purchases 50 percent of CITGO through its subsidiary Propernyn, B.V.

1990:

Petróleos de Venezuela becomes the sole owner of CITGO.

1995:

CITGO becomes the leading gasoline retailer in the United States.

1997:

CITGO's prospects in the Midwest expand with Petróleos de Venezuela's purchase of UNO-VEN Company.

Company History:

CITGO Petroleum Corporation, owned by PDV America, Inc., an indirect, wholly owned subsidiary of Petróleos de Venezuela, S.A. (PDVSA), the national oil company of Venezuela, is involved in the refining, marketing, and transportation of numerous petroleum products, including gasoline, diesel and jet fuel, petrochemicals, asphalt, refined waxes, and lubricants. CITGO owns and operates two crude oil refineries, in Louisiana and Texas, as well as two asphalt refineries, in New Jersey and Georgia. The company owns a 42 percent share of LYONDELL-CITGO Refining Co. Ltd., a joint venture from which CITGO acquires light fuels. In the late 1990s, in addition to selling jet fuel to airlines and supplying industrial products to manufacturers, CITGO was marketing its brand of gasoline through more than 15,000 independent retail outlets in the United States.

Early Years: 1900--15

The historical origins of CITGO can be traced 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. The 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 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, and 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, bringing together a total of 170 companies under the umbrella of Cities Service.

Oil Exploration from 1915

Because of a gas shortage experienced by its utility companies, Cities Service 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 realized the growing importance of oil to the U.S. economy, and he immediately organized a new Cities Service subsidiary, Empire Gas & Fuel, to take over the El Dorado operations. By 1917 Empire had more than 1,000 wells in production, and it produced over 36 million barrels in 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 increased the demand for the precious liquid. Warfare had become increasingly mechanized, and U.S. battleships and the recently invented tanks and aircraft required large quantities of oil for their operation. The German defeat of Russia in 1918 and its 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 what was at the time the world's largest dehydrator, the Empire, which extracted water from oil. By 1918 El Dorado was producing more than the combined Galician and Romanian oil fields under German control and 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 served 464,000 people in 20 states, mainly in the Midwest and Northeast. Its electric utilities served 144,000 people, and its transport operations, or so-called traction companies, carried 116 million passengers every year.

The postwar prosperity increased the demand for petroleum in the 1920s. The introduction of mass-assembly methods in automobile production reduced the price of cars to make them within the reach of the average U.S. family, and the growth in automobile ownership led to increased demands for gasoline. Also in the 1920s, Doherty played a key role in the founding of the American Petroleum Institute, in 1924. The 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 $2.14 per barrel. Cities Service was more fortunate than other oil companies, however, since its revenues from utility services stabilized income. Already, as the 1930s began, Cities Service was supplying almost 3,000 U.S. towns with both gas and electricity. The company also began the retail marketing of petroleum products throughout the country.

Consolidation and Innovation: The 1930s--40s

During the 1930s the administration of Franklin D. Roosevelt sought to coordinate utility services in U.S. cities, since unbridled competition and company failures often led to poor service and wild price fluctuations. In 1935 the Public Utility Act was passed, enabling 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 were required to dispose of all but one of their public utilities. They had to begin the process in 1938 and complete it by 1940. Ultimately, Cities Service retained its oil and natural gas business but was directed to dispose of all of its utility assets.

When Doherty died in December 1939, his place was taken by W. Alton Jones, who had served Cities Service ably as vice-president. The transition in company leadership, however, was soon overshadowed by the U.S. entry into World War II. An armored division required 60,000 gallons of gasoline per day, and during the war Cities Service operated its own tanker fleet, 13 of its own ships, and 18 government oil tankers. The vital role that oil played in the conflict eased government pressure on Cities Service to sell its utilities.

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, which was 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 that 'nobody ever sank a pipeline.'

In June 1942 the government decided to adopt his plan, and Roosevelt appointed 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 from Texas to Philadelphia, thus avoiding the U-boat-infested waters of the Atlantic. 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.

Decades of Change following World War II

After the war Cities Service continued to dispose of its utility assets, with the booming U.S. economy ensuring a good return on the sales. By 1958 all utility assets had been sold, and Cities Service had become a fully integrated oil company. With the loss of its utility business, Cities Service concentrated on oil and gas. 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, and modernization of the huge refinery continued throughout the 1950s.

On March 1, 1962, Jones, on his way to meet former President Dwight D. Eisenhower, a longtime friend, was killed in an air crash near New York. A succession of company leaders followed: 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 to be too large a mouthful. After 80,000 names had been put forward, CITGO was chosen as the new brand name. Along with the new name came a new gasoline, CITGO Premium.

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

Changing Hands in the 1980s

By 1982 Cities Service had become the 19th largest oil company in the United States, but 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, while 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. As of December 1982, Cities Service became a wholly owned subsidiary of Occidental Petroleum.

Cities Service's refining and marketing divisions were merged into a subsidiary, known as CITGO Petroleum Corporation and incorporated as such in 1983. In the same year Occidental sold CITGO to the Southland Corporation. The sale included the 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 outlets. In 1982 the company operated 7,300 7-Eleven stores in the United States and Canada. The company hoped to combine gasoline sales and groceries through its 7-Eleven chain, and the CITGO refinery seemed the best way to ensure a free-flowing supply of gasoline for the outlets. CITGO, however, did not live up to Southland's expectations. A nationwide overcapacity in the refining business led to increased refining costs and falling profits, and in 1984 CITGO posted a pretax loss of $50 million. In 1985 Southland cut CITGO's output by half. CITGO's 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 the study were the decisions to acquire a stable source of crude oil for CITGO's refinery and to enhance the CITGO brand name. The former goal was met in 1986 when Southland, which badly needed money to ease its own financial problems, sold 50 percent of CITGO to Propernyn, B.V., a subsidiary of PDVSA, for some $300 million. CITGO then became the operating arm of PDV America, Inc. When Southland experienced further financial losses, CITGO purchased the remaining 50 percent of its own stock for $661 million, making PDVSA the sole owner in January 1990.

Both CITGO and PDVSA benefited from the sale. Venezuela, a member of the Organization of Petroleum Exporting Countries (OPEC), was 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 U.S. consumers. Hall also welcomed the deal, since it secured a steady supply of crude oil and other feedstocks for its Lake Charles refinery.

Expansion in the Early 1990s

With a more stable supply, CITGO was able to embark on an aggressive expansion program to enhance the value of its brand. In 1985, 3,500 gasoline outlets carried the CITGO brand name, while by the end of 1990 the number had grown to about 10,000. Sales of gasoline to branded distributors increased 16 percent during 1990 alone. By this time the Lake Charles refinery had a rated capacity of 320,000 barrels a day, making it one of the largest such facilities in the United States.

In January 1991 PDVSA merged its other wholly owned U.S. subsidiary, Champlin Refining and Chemicals, Inc., a refiner of heavy crude oil, into CITGO. Champlin's refinery in Corpus Christi, Texas, produced high-grade gasolines, petrochemicals, and other petroleum products, and it also owned eight refined-products terminals, which brought CITGO's total to 51. Several months earlier, CITGO had purchased 50 percent of Seaview Oil Company, a Pennsylvania-based refiner and marketer. In February 1991, CITGO bought the remaining 50 percent of Seaview. Seaview's New Jersey refinery produced asphalt, naphtha, and other oils. PDVSA provided its own heavy Venezuelan crude oil to Seaview's refinery. Thus, the Seaview and Champlin mergers were in line with the company's expansion strategy.

CITGO enjoyed increasing success in the early 1990s, with net income in 1992 rising $15 million over 1991. The company continued to grow, and in 1993, with Lyondell Petrochemical Co., CITGO formed LYONDELL-CITGO Refining Co. Ltd. The terms of the joint venture included CITGO's pledge of a large sum of money for the upgrading of Lyondell's Houston refinery in order to increase its capacity for processing heavy crude, the type of oil supplied by PDVSA. In exchange CITGO acquired a minority interest in the company, with the opportunity to increase its interest to 50 percent after the completion of the upgrade.

CITGO made two key pipeline transactions in 1994 that paved the way for the company's expansion into the Midwest and central parts of the United States. It bought the southern section of ARCO Pipe Line Co.'s line, while also negotiating a transportation deal with Williams Pipe Line Co., which controlled pipelines in the upper Midwest. CITGO renamed the ARCO line Eagle Pipeline Co., which joined the LYONDELL-CITGO refinery with the Williams line. Also in 1994, CITGO purchased the CASA Pipeline, which opened up regions in southern Texas.

The aggressive expansion strategies resulted in a record year in 1994. Net income jumped 14 percent over the previous year, and CITGO had significant increases in market share. In 1989, according to the industry publication National Petroleum News, the company's share of total U.S. gasoline sales was 4.5 percent, which put CITGO in ninth place. In 1994 CITGO overtook third place with 8.22 percent. CITGO was also the second largest U.S. retailer of gasoline, with more than 13,000 branded retail outlets. Its marketers were satisfied with CITGO's service as well, winning the Suppliers Cup of the Petroleum Marketers Association of America four successive times. In addition, CITGO's petrochemical sales grew 77 percent in 1994, compared to 1993, and the company had an outstanding year in terms of safety. As Don Smith noted in October 1995 in National Petroleum News, 'Citgo has outpaced and outmuscled just about every one of its refining and marketing competitors in the past five years.'

Slowdown in Growth in the Mid-1990s

Credited for much of CITGO's rise to prominence was CEO Hall. When he retired in the spring of 1995, he handed the reins to Ralph S. Cunningham. Cunningham vowed to maintain Hall's strategic directions and corporate vision and said in an interview with National Petroleum News, 'Our drive at Citgo is to be the number one refining, marketing and transportation company in the United States.'

CITGO planned to spend $1.5 billion in the second half of the decade to upgrade the refineries in Corpus Christi and Lake Charles, and in 1995 the company completed the purchase of Cato Oil & Grease Co., a manufacturer of specialty petroleum products, including automotive, marine, industrial, and mining lubricants. CITGO continued to stay on its expansion track, but the company hit a number of sales snags in 1995 and 1996. Even though 1995 revenues reflected a 14 percent increase over 1994, net income declined. In 1996 revenues increased 28 percent, but net income fell 8 percent from 1995. Still, Cunningham and CITGO were undeterred. Cunningham stated that the company had performed well in light of poor refinery margins affecting the entire industry. In addition, in 1995 CITGO surpassed Texaco to become the largest gasoline retailer in the United States, adding 938 outlets and bringing its total to more than 14,000.

Several significant events occurred in 1997 for CITGO. The estimated $1.1 billion LYONDELL-CITGO refinery upgrade was completed in early 1997. The upgraded refinery became one of the most complex refineries in the United States, capable of processing more than 215,000 barrels of heavy crude oil daily. In May CITGO moved forward with its Midwest expansion when PDVSA announced its purchase of Unocal Corp.'s portion of UNO-VEN Co., a Midwest refining and marketing partnership between PDV America and Unocal. As a result, CITGO would assume operation of a refinery in Lemont, Illinois, and gain rights in UNO-VEN's Midwest marketing territory for the '76' brand, which covered 15 states and included a network of some 200 distributors who supplied approximately 2,300 independently owned retail outlets. Although suppliers were not obliged to switch to the CITGO brand, the company was confident that it could forge strong relationships with the majority of marketers.

After only two years at the helm, Cunningham resigned in mid-1997. In July, David J. Tippeconnic, formerly CEO of UNO-VEN, assumed the position. Although the company had suffered from declines in net income in 1995 and 1996, Tippeconnic voiced his confidence in CITGO, noting that parent company PDVSA had been doing extremely well since Venezuela opened up its oil business to other nations and that CITGO had the potential to become one of the top oil companies in the United States. Tippeconnic's confidence seems to have been warranted, as CITGO managed to reverse declining net income, with the figure in 1997 reaching $207 million, up from $127 million in 1996.

New Challenges in the Late 1990s

In 1998 CITGO was the top U.S. marketer of gasoline east of the Rocky Mountains. As a result of a joint venture between PDVSA and Amerada Hess Corp., which operated a refinery in St. Croix in the U.S. Virgin Islands, the company was also one of the largest refiners. By late 1998 CITGO gasoline was available at more than 15,000 retail outlets in 47 states, and in early 1999 the company launched its first major advertising campaign in an effort to enhance the CITGO brand and provide it with a stronger identity.

CITGO continued to expand its presence and to explore new opportunities. In January CITGO suggested that it was interested in selling its refinery in Illinois. Roberto Mandini, newly appointed president of PDVSA, revealed plans to focus CITGO's efforts on Latin America and the U.S. Gulf Coast and to scale down expansion in other U.S. markets. In July, however, CITGO decided to take the refinery off the market. In May 1999 CITGO formed CITGO Co. Ltd. in Dalian, China, and a few months later announced plans to build a lubricants blender there. The company also indicated interest in expanding its market in China.

The oil industry overall experienced turbulence in the late 1990s, which unavoidably affected CITGO. According to Tulsa World, Tippeconnic reported in early 1999 that excessive inventories of crude oil, coupled with the economic recession plaguing Pacific Rim countries, were causing energy companies to seek cost-cutting measures. Low refining margins continued to hurt oil company revenues, and CITGO's net income fell during the quarter ended June 30, 1999. The net income of $24.9 million was less than half of the net income reported for the second quarter in 1998, which reached $56.5 million. Although the outlook appeared bleak, Tippeconnic indicated that CITGO and PDVSA would continue to provide dependable and reliable service to the United States, particularly in comparison to suppliers in the Mideast, where political conditions were unpredictable.

Principal Subsidiaries: Cato Oil Inc.; CITGO Asphalt and Refining Company; Cit-Con Oil Corp.; CITGO Pipeline Co.; CITGO Co. Ltd. (China); LYONDELL-CITGO Refining Co. Ltd. (42%).

Principal Competitors: BP Amoco Corp.; Chevron Corp.; Exxon Corp.; Shell Oil Co.; Mobil Oil Corp.; Texaco Inc.

Further Reading:

• Brown, Wesley, 'CITGO Primed, Ready for Growth,' Tulsa World, November 9, 1997, p. E1.
• Edmond, Mark, 'Purchase of Uno-Ven Could Make Citgo No. 1 U.S. Gasoline Marketer,' National Petroleum News, February 1, 1997, p. 13.
• Ellis, William Donohue, 'On the Oil Lands with Cities Service,' Tulsa: Cities Service Oil and Gas Corporation, 1983.
• Smith, Don, 'Citgo's New CEO: Striving to Be Number One,' National Petroleum News, October 1, 1995, p. 81.
• Stancavage, John, 'Pipeline Buy Helps Citgo Boost Market Ranking,' Tulsa World, August 6, 1995, p. B1.
• Stewart, D. R., 'CITGO Leader Not Panicking,' Tulsa World, February 4, 1999, p. 1.

Source: International Directory of Company Histories, Vol. 31. St. James Press, 2000.

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