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FERC Fines BP $20M in 2008 Market Manipulation Case; BP Challenges Decision

BP plc has been fined $20.16 million and ordered to disgorge another $207,169 by FERC after the agency found affiliates of the company had gamed the market for natural gas at the Houston Ship Channel (HSC) in 2008 after Hurricane Ike, a decision the London-based supermajor says it will continue to challenge.

The decision was 3-0 with Chairman Norman Bay, who headed the Office of Enforcement (OE) when the case was first opened, recusing himself.

In a 200-page opinion released Monday, the Federal Energy Regulatory Commission affirmed the findings of FERC administrative law judge (ALJ) Carmen Cintron, who concluded last August that affiliates of BP gamed the market for natural gas at the HSC during two and a half months after Hurricane Ike in "...a classic case of physical for financial benefits [IN13-15]" (see Daily GPIAug. 13, 2015).

Cintron said BP America Inc., BP Corp. of North America Inc., BP America Production Co. and BP Energy Co. (collectively BP) engaged in market manipulation by which the company's "Texas team" of BP's Southeast gas trading desk "...intentionally sold large volumes of next-day physical gas at HSC in a way designed to benefit their corresponding short financial positions."

"BP strongly disagrees with the Commission's decision, which endorses the unjustified conclusions of the FERC enforcement staff," said BP spokesman Geoff Morrell. "BP will seek rehearing before the FERC and ultimately appeal to the Court of Appeals if necessary. This decision should be reversed both because there is no credible evidence that BP's natural gas traders engaged in any market manipulation and because the FERC does not have jurisdiction over the trading at issue."

FERC’s OE  "...has since 2010 insisted that some finding of market manipulation is warranted because of a single audio taped conversation between two BP traders," the company said in its earlier rebuttal to the ALJ’s initial decision. "OE mischaracterized the context and content of that call and disregarded the fact that the call refers to none of the alleged manipulative behavior postulated by OE's experts.

"BP has contested and continues to contest OE's claims because they are devoid of any support in fact or in law."

BP cooperated with the OE staff's investigation, but did not use its internal inquiry to assist staff and did not take other steps to remedy the harm, FERC said.

"We find the violation here to have been very serious," FERC said in its order. "BP manipulated the market to profit from a natural disaster, and it did not stop after a trade or two but rather kept the scheme going for nearly three months. BP's scheme did not simply defraud its counterparties; by manipulating the Houston Ship Channel index, BP affected the price of natural gas throughout the Houston region and thereby altered the value of physical and financial transactions of everyone trading in the region -- even those who did not trade with BP. This sort of 'ripple effect' is one reason why the manipulation of natural gas indexes is so damaging: other market participants and consumers are the inevitable victim of the sort of scheme that BP's traders concocted.  

"The Commission deregulated wholesale natural gas prices to achieve Congress' directive that rates be just and reasonable, but this sort of market manipulation undermines the value and stability of our deregulated markets, and if left undeterred ultimately may raise questions about whether the benefits of deregulation outweigh the costs."

BP's manipulative scheme caused financial losses of $1.38-1.93 million and affected more than 35 Bcf of physical and financial natural gas, FERC said.

OE staff "contended that BP committed hundreds of violations during the 49 trading days of the investigative period, with a minimum of 48 violations," according to the order. "Specifically, enforcement staff pointed to four types of affirmative conduct that occurred, and that during the investigative period BP made 680 fixed-price sales, 101 bid-initiated sales at Houston Ship Channel when a more economical offer existed at Katy, and 129 offer-initiated sales when the team could have made more money at Katy.” BP maintained that no violations occurred or, in the alternative, that the number of days was fewer than alleged by FERC.

Last September, BP appealed Cintron's initial decision (ID) in the case (see Daily GPISept. 15, 2015Sept. 23, 2014). The ALJ's findings were in line with previous recommendations from the FERC OE, which BP disputed. Cintron found that BP violated Section 4 of the Natural Gas Act and FERC's Anti-Manipulation Rule and that the traders knew what they were doing was wrong.

"The trading at issue took place in a very unusual environment: in the midst of the financial crisis of 2008 and in the aftermath of Hurricane Gustav and on the heels of Hurricane Ike," BP said at the time.

"There is no direct evidence of manipulation. OE's case is flawed exegesis of trading data, which BP has rebutted in detail. The ID turns the procedural protection embedded in the Natural Gas Act on its head by requiring BP to affirmatively prove its innocence."

The order was approved by Commissioners Cheryl LaFleur, Tony Clark and Colette Honorable.

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