Affiliates of BP plc gamed the market for natural gas at the Houston Ship Channel (HSC) during two and a half months in 2008 after Hurricane Ike in "...a classic case of physical for financial benefits," a FERC administrative law judge (ALJ) said Thursday. The ALJ opinion is not final and is subject to Commission review. BP strongly objected and will appeal the judgement.
ALJ Carmen A. 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 [IN13-15]."
Beginning on Sept. 18, 2008, a trader identified as "Comfort" began to manipulate the Gas Daily HSC index "...to slow the shrinkage of the very valuable spread position in the Texas team's book," the ALJ wrote. "After a successful September the Texas team extended the manipulation through October and November 2008.
"The Texas team trading during the investigative period was markedly different than their trading before the investigative period. There is no economic or other justification for their changed and unprofitable trading patterns."
The ALJ found that BP violated Section 4 of the Natural Gas Act and the Federal Energy Regulatory Commission's Anti-Manipulation Rule and that the traders knew what they were doing was wrong. "BP participated in an unlawful scheme to manipulate the HSC Gas Daily index to benefit their financial positions. Further, it is concluded that they did so with the requisite scienter and in connection with jurisdictional transactions."
Geoff Morrell, BP senior vice president of U.S. communications and external affairs, said the company will appeal the findings.
"As BP demonstrated at the hearing, the FERC enforcement staff's allegations are entirely without merit,” he said in a statement. “The evidence overwhelmingly demonstrated that BP's natural gas traders did not engage in any market manipulation, and FERC has no jurisdiction over the trading at issue in any event. As the leading marketer of natural gas in North America, BP is committed to adhering to the highest ethical standards, conducting all trading in compliance with all laws and regulations, and maintaining a strong control and compliance environment. BP will appeal this decision to the full Commission, as required by federal administrative procedure law."
The findings of the ALJ are in line with those filed last September by FERC's Office of Enforcement (OE) from analysts who looked into the matter (see Daily GPI, Sept. 23, 2014).
The Commission initially proposed a near-$29 million penalty for transactions taking place during the investigative period. According to Cintron's opinion, the Texas team's gross profits from the index manipulation were between $233,330 and $316,170, and net profits ranged from $165,749 to $248,589. The judge did not recommend penalty or disgorgement figures, although it was noted FERC staff was claiming 48 violations. Depending on the Commission’s final decision, BP could be charged a million dollars for each of those violations. Disgorgement may be related to profits.
Cintron said the Texas team's HSC-Henry Hub spread position benefited from the team's suppression of the Gas Daily HSC index "...regardless of other positions BP had in its portfolio in the Gulf [Coast] area."
According to the ALJ, it was logical for the investigation to compare the Texas team's HSC-Henry Hub spread profit and loss (P&L) to examine its intent. "The traders were focused on their short HSC Gas Daily exposure, and the Texas team P&L was calculated separately from the other SEGT [Southeast Gulf Texas] desks and was a factor in determining their bonuses."
More specifically, the ALJ said the team made 680 fixed-price sales at HSC and 101 bid-initiated sales at HSC "...when they could have hit a more economic bid at Katy, and 129 offer-initiated sales when they could have sold more economically by adjusting their offer price at Katy."
The period of the activity covered 49 trading days, representing 73 gas flow days.
"If each individual trade is treated as a separate violation, the facts support a high number of violations," the ALJ said. "However, staff recommends a minimum number of 48. Accordingly, it is concluded that there were at least 48 violations during a period of 49 days.
"BP's manipulation resulted in financial losses of $1,375,482 to $1,927,728 on the next-day natural gas markets at HSC and Katy during the investigative period. The amount of natural gas involved in BP's sales of next-day, fixed-price physical gas at HSC in the investigative period was 10,632,400 MMBtu. The amount of natural gas involved in the financial natural gas positions at HSC in the investigative period was 25,310,000 MMBtu."
The ALJ opinion recounts the findings of FERC OE staff. Hurricane Ike made landfall on Sept. 13, 2008, causing HSC prices to plunge relative to Henry Hub, OE staff said. "This resulted in the Texas team having a large realized and unrealized profit, based on the team's HSC-Henry Hub financial spread position," the opinion said. The profit gave the Texas team a financial incentive to slow the shrinkage of the spread. "The Texas team subsequently increased their short exposure to the HSC Gas Daily index for both October and November 2008."
The ALJ also noted OE staff's contention that the team also manipulated gas prices by increasing physical positions in a way that would suppress the index. The staff found that after Hurricane Ike, the Texas team changed its next-day, fixed-price gas trading and transport in eight different ways.
"Enforcement staff additionally avers that the changes in trading patterns during the investigative period cannot be explained by any economic or profit rationale, general market conditions, or comparison to HSC's other two largest sellers' behavior," the ALJ wrote.