BP (NYSE: BP) Natural Gas Manipulation

Brian Hicks

Written By Brian Hicks

Posted August 7, 2013

It looks like BP (NYSE: BP) has found itself in yet another sticky situation. This time, the oil giant is being accused of manipulating natural gas prices in Texas.

The Federal Energy Regulatory Commission (FERC) alleges that BP increased the value of its gas contracts by fixing the price of physical gas through false trades.

BP LogoThe FERC, which has been flexing its regulatory muscle as of late in the natural gas markets, announced the accusation Monday and is threatening the energy company with fines that total close to $29 million.

The FERC first identified the problem in 2011 and is now taking aim and clamping down on the energy giant.

BP has kept a relatively clean nose since it shelled out $303 million in 2007 to the U.S. Commodity Futures Trading Commission, according to Reuters, amid allegations that it was manipulating the propane markets in 2003 and 2004.

The FERC has the whole industry feeling uneasy right now, but that’s good news for most of us. Trading practices are being scrutinized and heavily analyzed like never before. The commission is doing its part to make sure we don’t see another situation like Enron ten years ago.

BP has completely denied the allegations, of course, and insists they carry no merit.

Regardless, the commission has granted BP 30 days to either pay the fine or contest the order.

The Guardian reports:

Geoff Merrell, BP’s head of communications, said in a statement: “BP is disappointed that the FERC has brought this action and we will vigorously defend against these allegations. 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 Probe

That phone conversation that Mr. Merrell is referring to took place more than two years ago. It eventually found its way into the FERC’s hands.

In total, the FERC is seeking $28 million in penalties plus $800,000 in profits.

When the conversation was first identified, it was reported to a BP compliance group established after the 2007 propane settlement. From there, the FERC claims the matter was not handled seriously, and the group failed to collect critical data from the accused time period.

That time period began in September 2008 and ran through November 2008. During that time, BP traders were supposedly using two natural gas hubs, according to Reuters, in Texas, Katy, and the Houston Ship Channel, in a way that the company may have been unfairly trading to benefit another position.

The way it allegedly worked was this: BP interests would rise in value if prices at the Houston Ship Channel fell in relation to prices at the Henry Hub in Louisiana, the benchmark point for the company’s U.S. natural gas futures contract.

When Hurricane Ike struck Galveston, Texas on September 13, 2008, the Houston Ship Channel was drastically affected, as pipelines were shut off and prices went racing down.

All of a sudden, BP’s position was worth millions, but only if prices remained at rock bottom through the end of the month.

BP traders started selling physical gas at a loss in the Houston Ship Channel shortly after Ike. And because it appeared to be working, they carried the strategy into November 2008.

The rest is history, and BP now finds itself in the hot seat.

Wary Investors

There isn’t a whole heck of a lot that we as investors can do about the unethical practices by some of these companies. We act on good faith and trust that they will conduct business in the proper manner, but greed often lurks in the background.

The good thing: the FERC isn’t playing games. It’s being very aggressive, going straight to the top in an effort to create a compliant oil and gas industry.

It’s got Wall Street shaking in its boots. The FERC’s surge of power comes from more congressional backing, including a mandate that allows it to levy fines up to $1 million a day – a number that was previously at a limit of $10,000 a day and laughed at by most of these companies.

This BP assault is just the latest in the FERC’s newfound glory. According to the Guardian, Constellation Energy, Deutsche Bank (NYSE: DB), and a slew of others have felt the wrath of the FERC, as it has levied some $1.3 billion in fines and penalties on Wall Street since 2005.

Barclays Plc (NYSE: BCS) is in a heated battle with the FERC right now. Last month, it vowed to fight the $470 million fine imposed for allegedly manipulating markets in California.

And just last week, JP Morgan Chase & Co (NYSE: JPM) settled its case for $410 million.

These are all good signs that we can breathe a little easier, throw the dice a little more, and let the good times roll.

No more funny business.


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