BP Disappointed: U.S. Regulators Claim Trading Misconduct

natural gas

BP (NYSE:BP) is no stranger to hefty fines, but they are disappointing nonetheless.

On Monday, U.S. federal energy regulators ordered BP to defend itself against allegations that one of its units did not manipulate the natural gas market. The request came with a chunky price tag — a $28 million fine, plus the return of $800,000 in illegal profits. While that fine pales in comparison to the $303 million the company paid the Commodity Futures Trading Commission in 2007 to settle allegations it manipulated the propane market, fines are beginning to be a problem, especially with the magnitude of Gulf of Mexico spill bill still growing.

In its second quarter results, the oil producer revealed that restitution-related costs skyrocketed, leaving just $300 million in the $20 billion fund set up to compensate oil spill victims. The deadline to file claims of economic loss for Gulf Coast businesses, which account for the majority of the payouts, is not until April of next year, so BP has said any future restitution payments will be deducted straight from earnings, which amounted to $2.712 billion in the past quarter.

On February 1, 2011, BP notified its shareholders that the U.S. Federal Energy Regulatory Commission, or FERC, and the Commodity Futures Trading Commission were investigating whether the company manipulated the natural gas market. The investigation found that a trading team at BP moved natural gas through a pipeline linking two Texas hubs — Katy and Houston Ship Channel —  in a manner that uneconomically used the company’s transportation capacity.

According to the FERC report, this action served to manipulate prices in the aftermath of a 2008 hurricane. The regulator said the BP traders “suppressed the Houston Ship Channel Gas Daily index with the goal of increasing the value of the company’s financial position at Houston Ship Channel from mid-September 2008 through November 2008.” The hurricane trapped supplies around Houston, which boosted the value of its bearish bet on prices of natural gas.

Now, the company has 30 days to file a reply to the so-called “show cause” order.

“BP is disappointed that the FERC has brought this action and we will vigorously defend against these allegations,” said the company in a statement.

“The FERC bases its allegations on a recorded two-minute phone conversation between a BP trainee and BP natural gas trader that the regulator has taken completely out of context,” the company stated in the press release. “The recording does not support any allegation of wrongdoing. In fact, the trainee involved in the conversation states that his characterization was incorrect, and the trader never agrees with nor condones the trainee’s statements. The trader also reacts strongly to the trainee’s comments and interrupts him because the trainee’s comments – as the trainee admits on the call – are incorrect and inappropriate.”

Congress bolstered the FERC’s enforcement power in 2005, following the California energy crisis and the Enron scandal. Since then, the regulator has investigated several high profile market manipulation cases. At the end of July, JPMorgan Chase (NYSE:JPT) agreed to pay $410 million to settle claims it had manipulated the power markets in California and the Midwest in 2010 and 2011. Congress is also looking to crack down even further on commodities trading. Last month, the Senate began hearings meant to uncover how Wall Street has broadened its scope from banking to global markets for essential commodities.

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