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UPDATE 3-U.S. regulator seeks $29 mln from BP over natgas trading
August 5, 2013 / 1:22 PM / 4 years ago

UPDATE 3-U.S. regulator seeks $29 mln from BP over natgas trading

By Scott DiSavino
    Aug 5 (Reuters) - U.S. federal energy regulators on Monday
ordered BP Plc to respond to allegations of natural gas
market manipulation in Texas, threatening the energy company
with fines near $29 million.
    The move likely sets up another major legal battle for the
Federal Energy Regulatory Commission (FERC) as it steps up
policing of power and natural gas markets.
    In the order, FERC pointed to a two-minute recorded
conversation between a BP trainee and a senior gas trader as
evidence that BP bought and sold gas at a possible loss in the
physical market in order to increase the value of BP's
derivatives position. 
    BP said the recorded call was "taken out of context." The
company will "vigorously defend against these allegations,"
spokesman Geoff Morrell said in a statement. He said the charges
were "without merit" and that BP stood by public statements
issued in February 2011 that maintained that the gas traders did
not engage in market manipulation.
    The commission said BP has 30 days to pay the fine or
contest the order.
    FERC has another contentious legal case brewing with
Barclays Plc, which last month vowed to fight a $470
million fine for allegedly manipulating California power
    JPMorgan Chase & Co settled a separate case for $410
million last week.
    FERC first notified BP that it was investigating the
company's trading in the Houston natural gas market about two
years ago. FERC is seeking penalties of $28 million and the
return of $800,000 in profits, plus interest, it said on Monday.
    The proposed fine for BP is much smaller than others FERC
has pursued over the 18 months of its crackdown on manipulative
trading. Congress bolstered FERC's enforcement power in 2005
following the California energy crisis and the Enron scandal.   
    BP paid $303 million to the U.S. Commodity Futures Trading
Commission in 2007 to settle allegations the company tried to
manipulate the propane market in 2003 and 2004. Since then, BP
has clamped down on trader pay and oversight.    
    The FERC order said that the natural gas trading activity
was reported to an internal BP compliance group established
after the 2007 propane settlement. FERC said that while BP
conducted an internal investigation, it had failed to take the
probe "seriously" and had failed to collect "critical" trading
data from the period.
    Traders and executives have questioned whether FERC is
focusing on trading practices that are less obviously
manipulative than the Enron-era scandals of a decade ago,
leading some to say it is unnerving many in the industry.
    FERC alleges that BP's traders used the company's
transportation capacity between two natural gas hubs in Texas,
Katy and the Houston Ship Channel, in a manner that suggested BP
was trading to benefit another position.
    Going into September 2008, FERC said BP had positions that
would rise in value if prices at the Houston Ship Channel fell
relative to those at Henry Hub in Louisiana, the delivery point
for the benchmark U.S. natural gas futures contract.
    When Hurricane Ike made landfall near Galveston, Texas, on
Sept. 13, 2008, Houston Ship Channel prices plummeted as many
small intrastate pipelines were shut in, resulting in
lower-than-normal flows of gas out of the Houston region.
    FERC said this meant the company's position was suddenly 
worth millions of dollars, but only if Houston Ship Channel
prices stayed depressed until the end of the month.
    FERC said senior BP gas trader Gradyn Comfort, with the
cooperation of two colleagues, Nesha Barnhart and Clayton
Luskie, began selling physical gas at loss-making prices in the
Houston Ship Channel around Sept. 18.
    Because the alleged scheme appeared to be working, FERC
said, the traders extended the trading strategy into November
    To implement the plan, FERC said the traders "only had to
expand their existing positions and exploit more of the
(company's) transport capacity, rather than justify an entirely
new trading strategy to their supervisors."
    FERC said the "manipulative scheme" was discovered when
Luskie was at a BP trader-training program in November 2008 and
"tried to impress a senior BP trader by explaining the team's
scheme," FERC said. Luskie had only worked for the firm since
that August.
    When the senior trader questioned the legality of their
strategy, Luskie called Comfort, a trader with 17 years
experience, on his number at the trading desk - a recorded line.
    On the Nov. 5, 2008, recorded call, FERC said Luskie
repeatedly asked Comfort for a legitimate explanation of the
team's physical trading.
    "So how would you explain our, um, our dealings on (Houston
Pipeline) and with our paper position that don't make it sound
like we're manipulating the index?" Luskie asked Comfort,
according to the FERC order.
    Comfort's initial reaction was to cut off Luskie's
questioning, FERC said. When pressed further by Luskie, Comfort
made a few short statements, interspersed by long pauses.
    Luskie subsequently called back on an unrecorded cell phone
circuit, FERC said.
    BP denied its traders did anything wrong and said "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 recording does not support any allegation of
wrongdoing," BP's Morrell said. "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."
    Despite Comfort's repeated interruptions, FERC said Luskie's
statements on the recorded call were sufficient to provide staff
with an outline of the traders' scheme, which the underlying
trade data confirmed.

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