BP PLC's global trading desk has long enjoyed a reputation for aggressive wheeling and dealing in the world's vast energy markets. But allegations the British giant manipulated U.S. propane prices paint a much more troubling picture of BP's trading operations.
Telephone conversations, correspondence and other documents -- released this week as part of civil and criminal complaints filed in the U.S. alleging energy-market manipulation -- offer a glimpse into one of BP's dealing rooms, where traders allegedly concocted and tested a bold but illegal strategy to boost profits. Management and compliance officials approved or encouraged the maneuvers, at times suggesting ways to avoid drawing regulatory attention, according to the complaints.
The U.S. Commodity Futures Trading Commission filed Wednesday a civil complaint in Chicago alleging that BP illegally manipulated a crucial market for propane in early 2004, driving up prices for millions of consumers of the home-heating fuel. It identified a team of Houston traders who it said bought up propane to gain control of the market and thereby boost prices, in a strategy they thought might net as much as $20 million.
While the scheme temporarily increased prices, it didn't make BP much money, according to the CFTC complaint. Traders and managers, however, tried to learn from their mistakes, circulating a set of "lessons learned" to help refine the strategy for other traders and other energy markets, the complaint alleges. The U.S. Justice Department is pursuing a separate criminal investigation.
BP denies it engaged in market manipulation and says it will defend itself against the charges in court. The company declines to discuss the charges in detail, citing the pending litigation. BP executives said they have tightened compliance rules on trading floors.
BP has built a sizable proprietary trading business. The company sells the oil it pumps from the ground to customers, and it buys crude and other feedstock for its refineries and chemical plants. BP also buys and sells oil and petroleum products, and derivatives based on them, for its own account. The company made $2.97 billion in profit last year from its trading operations, about 13 percent of its 2005 net income of $22.34 billion.
Critics say BP has an advantage over smaller players because it can use its financial heft and privileged view of how large volumes of oil, natural gas and petroleum products move through its vast pipeline systems and storage facilities.
The manipulation allegations raise questions about whether BP is inappropriately using its own operational information to aid its traders. In the "lessons learned" PowerPoint presentation that BP traders drafted after the propane trades came under scrutiny, a copy of which was part of the CFTC complaint, they noted that operational information from another BP unit could help future deals.
Company executives have said in the past that it is appropriate to use their operational knowledge to benefit the trading floor. "This is about the combination of physical assets and trade, and it's all about the webbed nature of the combination that allows you to create value," said BP Chief Executive John Browne in a 2004 interview. "You really are creating value. In most cases, the end user is benefiting through the reduction of risk."
The propane allegations are the latest in a series of compliance difficulties BP traders have faced over the past several years. CFTC investigators alleged that a BP trader executed in 2000 a series of wash trades -- prearranged swaps of the same amount of a commodity for the same price. Traders from a handful of other companies used such bogus deals to inflate revenue figures, exaggerate trading volumes or affect prices, though the intention of the BP trades isn't clear. The company settled and agreed to pay a $100,000 fine, without admitting or denying wrongdoing.
In 2003, the New York Mercantile Exchange fined BP a record $2.5 million for a series of improper crude-oil trades in 2001 and 2002, without disclosing the nature of the deals. BP settled again without admitting or denying wrongdoing. As part of the deal, BP promised to tighten compliance on its trading floor.
A few months after that settlement, however, a group of BP traders in Houston came up with a complex plan for making money in U.S. propane markets, according to the government complaints filed this week. Close to half of the U.S.'s propane demand goes to residential and commercial heating.
Much of that demand is concentrated in the Northeast and upper Midwest, in rural areas not serviced by natural-gas networks. That market is served by the Texas Eastern Products Pipeline Co., a pipeline and storage network that runs from Mont Belvieu, Texas, through Ohio and into New York, Pennsylvania and Illinois. Traders call propane running along this line "TET propane."
BP traders determined they could profit handsomely by buying up stored propane along the line and creating the impression of a supply shortage, according to the complaint. That would stoke prices, especially toward the end of the month as short traders scrambled for propane. Short traders have commitments to deliver propane at month-end delivery dates as part of a bet that prices will fall, but don't actually keep it on hand.
On Jan. 8, the government alleges, Mark Radley, manager of the Houston-based natural-gas liquids, or NGL, trading team, told other BP traders the market was "vulnerable to a squeeze," according to taped phone records. BP declined to discuss specific disciplinary action, but in an attachment to the CFTC complaint, regulators said Mr. Radley was fired by BP in connection with the trade. His attorney didn't return a phone call and email message seeking comment.
On Feb. 5, Mr. Radley discussed the benefits of the deal with a lieutenant on the trading floor, Dennis Abbott, according to the complaint. "What we stand to gain, is not just we'd make money out of it, but we would know from thereafter that we can control the market at will," he said, according to phone recordings.
In a criminal plea filed by the Department of Justice, Mr. Abbott admitted to participating in the alleged market manipulation and is cooperating in the criminal probe. His attorney declined to comment in an email.
Before the traders started buying, Mr. Radley and his superior, James Summers, vice president of BP's NGL trading division, met with Martin Marz, the division's compliance manager, according to the complaint. Mr. Marz approved the strategy but cautioned traders to refrain from using certain words in conjunction with the deal, including the word "squeeze," according to the complaint.
CFTC investigators said in their complaint that Mr. Marz has been removed from his 2004 position but is still at BP. His attorney didn't return a phone call seeking comment. It is unclear if Mr. Summers still works at BP. His attorney didn't return a phone call and email message seeking comment.
Through February, BP's position grew to more than 88 percent of the storage capacity on the line, according to the complaints. By late February, listed prices of TET propane started to tick sharply higher. By the end of the month, prices had risen from just above 60 cents a gallon early in the month to more than 90 cents a gallon in some cases, according to the complaint.
The spike was brief, however, with prices falling back to earth once the end of the month passed and pressure lessened among shorts to buy up physical propane. The cost of buying up the propane to corner the market ended up being more than the profit made by selling propane at higher prices, according to the CFTC complaint, making the total profitability of the plan unclear.
After the scheme fizzled, BP managers ordered up a review of the strategy to figure out how it could be improved in the future, regulators allege. That review included the "lessons learned" PowerPoint presentation. The aim of the review was partly to determine "if there's any applicable opportunities in some of the other markets" for the scheme, the complaint quotes Mr. Radley as saying.
The review also identified some key compliance risks, first among them "regulatory." The scheme didn't violate any current rules, BP officials determined in the presentation, but it "could increase the risk of regulatory intervention."