Energy giant BP plc cleared up a backlog of violations last week as it reached agreements with a number of federal agencies to pay $380 million in penalties, restitution and other payments for allegedly manipulating the propane market, violating natural gas pipeline policies, a fatal explosion at its Texas City refinery in 2005 and crude oil pipeline leaks in Alaska in 2006.
The settlements were part of sweeping, coordinated action brought by the Department of Justice (DOJ), the Commodity Futures Trading Commission (CFTC) and the Environmental Protection Agency last Thursday, with the aid of the FBI, U.S. attorney's offices and U.S. Postal Inspection Service. In parallel action, the Federal Energy Regulatory Commission assessed penalties on a BP affiliate for violations of the agency's capacity-release policies.
The biggest chunk of the $380 million is to settle DOJ and CFTC charges that BP Products North America Inc., a subsidiary of BP America, manipulated and attempted to manipulate the propane market in early 2003 and 2004. The company has agreed to pay $303 million to settle the charges, federal authorities said.
The CFTC settlement, which was approved by U.S. District Judge Ruben Castillo of the Northern District of Illinois, is the largest manipulation settlement in the history of the agency, said Acting CFTC Chairman Walter Lukken. The CFTC found that BP cornered the propane market in February 2004 and attempted to manipulate propane prices in April 2003.
"BP engaged in a massive manipulation -- the magnitude of this settlement reflects that the Commission will not tolerate trading abuses in our open and competitive markets," Lukken said.
In connection with the propane manipulation scheme, the DOJ filed an agreement in the Illinois federal court to defer prosecution of a one-count criminal information charging BP with conspiring to violate the Commodity Exchange Act and to commit mail fraud and wire fraud. The department will defer prosecution against the company for three years and BP America has agreed to cooperate with any ongoing investigation into the company's trading activities.
The judge's consent order requires that BP pay a $125 million civil penalty to the CFTC, establish a compliance and ethics program, and install a monitor to oversee BP's trading activities in the commodities markets. It also requires BP to pay $53 million into a restitution fund, which would be administered by a third party.
The DOJ's deferred prosecution agreement requires BP to pay a $100 million criminal penalty for manipulation of the propane market, plus $25 million into a consumer fraud fund, as well as make payments to the restitution fund and install a monitor.
In related action, a federal grand jury in Chicago last Thursday returned a 20-count criminal indictment against four former employees of BP America -- Mark David Radley, James Warren Summers, Cody Dean Claborn and Carrie Kienenberger -- for artificially inflating TET propane prices in February and March 2004. The TET propane market refers to propane that is deliverable at the Texas Eastern Products Pipeline Co. (TEPPCO) storage facility in Mont Belvieu, TX, or anywhere within the TEPPCO pipeline system. The TEPPCO pipe runs from Mont Belvieu up through Ohio, into New York, Pennsylvania and Illinois.
BP Products North America also agreed to plead guilty to a felony violation of the Clean Air Act (CAA) for the explosion at its Texas City refinery in March 2005, which killed 15 contract workers and injured more than 170 others. The company will pay a penalty of $50 million and has been put on three-year probation for the blast, which was caused by the improper release of vapor and hydrocarbon liquids. This is the largest fine ever assessed on a single entity under the CAA law, according to DOJ officials.
BP admitted that from 1999 up until the day of the explosion, March 23, 2005, several procedures required by the CAA for ensuring mechanical integrity and a safe startup of a unit, which is used to increase the octane content in unleaded gasoline, had either not been established or were being ignored, federal authorities said.
The department imposed a criminal fine of $12 million on BP Exploration (Alaska) for two pipeline leaks in the North Slope region of the state. The two leaks combined resulted in the discharge of 201,000 gallons of crude oil. The company also has agreed to make a $4 million community service payment to National Fish and Wildlife Foundation and a $4 million payment to the state of Alaska.
In action that coincided with those of other federal agencies, the Federal Energy Regulatory Commission (FERC) last Thursday assessed civil penalties totaling $7.3 million in approving settlements of two separate enforcement matters involving BP Energy Co. and Anadarko Petroleum Corp. subsidiary MGTC Inc. Both settlements involved self-reported violations of FERC's capacity-release policies. Different facts and circumstances, however, resulted in BP agreeing to settle with a payment of $7 million and MGTC settling for $300,000.
"FERC's capacity release program is a core element of our natural gas regulatory program, and violation of the regulations and requirements governing capacity release warrants significant penalties," Chairman Joseph T. Kelliher said. "Each company could have faced substantially higher penalties had it not self-reported its violations, and had it not also demonstrated exemplary cooperation with FERC's enforcement staff during the investigation."
BP will pay a civil penalty of $7 million and implement a compliance monitoring plan to resolve multiple self-reported violations of regulations for posting and bidding of released capacity, the shipper-must-have-title requirement, and the prohibition on buy-sell transactions. The violations involved thousands of individual transactions in 2005 and 2006 stemming from BP's management of customers' capacity rights on interstate natural gas pipeline and storage facilities.
FERC said the most serious of BP's violations involved a practice known as "flipping," which evidences a deliberate strategy for evading Commission regulations that require posting and competitive bidding for discounted long-term releases of capacity.
BP avoided the posting and bidding requirements by improperly arranging for serial short-term releases of discounted capacity to two BP-affiliated replacement shippers on an alternating monthly basis, an arrangement that continued for 22 months in one instance, according to FERC. It found that BP transported 24.9 Bcf of natural gas on capacity it acquired improperly through flipping transactions. The Commission noted that this practice is "particularly serious in nature" and "warrants a substantial civil penalty."
In addition to the flipping violations, BP had several shipper-must-have-title violations and engaged in two prohibited buy-sell arrangements, FERC said. In total, BP's violations involved 49.3 Bcf of gas and occurred on 14 major pipeline systems. The Commission also noted that BP's actions "directly affected the transparency of the secondary market for natural gas transportation" and "impaired the effectiveness of the Commission's pipeline open-access policies.
On top of paying the civil penalty, BP will implement a compliance monitoring plan for at least one year under the enforcement staff's supervision.
MGTC agreed to pay a civil penalty of $300,000 and submit a compliance report to resolve its self-reported violations of the Commission's shipper-must-have-title requirement regarding a contract for interruptible transportation on its affiliated interstate pipeline, MIGC Inc. FERC found that MGTC violated the shipper-must-have-title requirement and MIGC's tariff, under which the title requirement applies to interruptible as well as firm transportation.
MGTC has transported about 17.2 Bcf of natural gas since 1998 in violation of the shipper-must-have-title requirement, according to FERC. The Commission noted that, in addition to occurring on an interruptible contract, MGTC's violation did not result in unjust profits nor was there any demonstrable harm to third parties caused by MGTC's violations.
In addition to the civil penalty, MGTC will submit a compliance report verifying the steps it has taken with respect to all related aspects of the transportation transaction(s) to correct the violation.
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