Royal Dutch Shell Plc .com: Aggressive trading culture surfaces at BP

From The Financial Times
By Jeremy Grant, Kevin Morrison and Carola Hoyos

Published: July 4 2006 03:00 | Last updated: July 4 2006 03:00

At a Senate hearing in 2002, Ross Pillari, BP’s then North America chief, received a grilling from US lawmakers about the company’s North American trading practices.

At stake was a series of statements that BP had made in a 1999 “brainstorming document”.

In it, BP strategists spoke of “significant opportunities to influence the crude [oil] supply/demand imbalance” in the US Midwest.

Senator Carl Levin, a Michigan Democrat with long experience scrutinising the energy markets, got Mr Pillari to agree with him that the recommendations in the document were “outrageous”.

Apparently stung by the experience, Mr Pillari felt the need to write a follow-up letter to the senators making clear the strategies discussed in the document were “unacceptable and inappropriate” and never went further up the chain of command.

Fast forward four years to last week.

The Commodity Futures Trading Commission alleges that BP’s US propane trading team manipulated the price for propane in the Midwest and US north-east in 2004.

The CFTC alleges that the strategy was based on an earlier “trial run” that was devised in 2003 – only a year after Mr Pillari’s appearance before the Senate.

Crucially, the CFTC says the alleged manipulation took place with the knowledge and approval of senior BP management.

BP says no manipulation took place.

The two cases are unconnected. But taken together they appear to point to the existence of a unique trading culture at BP that sets it apart from its rivals such as Shell and Exxon.

It is a culture of aggressive trading, fuelled by above-average incentives for traders, that has its roots in BP’s dominance of trading since the company’s roots as “Anglo-Persian Oil” in the 1900s.

“They are more entrepreneurial and take greater risks than other oil companies,” says one person familiar with BP’s energy trading arm.

A second person says of BP’s North American trading operation: “It permeates their whole trading operation.”

BP produced oil from south-west Persia, now Iran, but had few outlets to refine and market it. This meant the company needed to build up its trading operations in order to sell the oil on.

BP is now the most active energy trader among its peers. It also pays bigger bonuses than other oil companies, and its traders are able to take larger positions than its rivals. This may help explain why BP has incurred more fines than some of its closest rivals for manipulating prices.

ExxonMobil says that, since its merger in 1998, it has not been fined for improper trading. BP Energy was fined $100,000 by the CFTC in 2004 for “wash trading”, while Shell Trading US was fined $300,000 this year, also by the CFTC, for “non-competitive” and “pre-arranged trading”.

The first person said BP traders were able to take bigger gambles than other oil companies, adding that a gas trader at Royal Dutch Shell Group had a position limit of $200,000 (£109,000), whereas his counterpart at BP was set a trading limit of between $1.5m and $2m.

The UK-based company, like its peers in the US and Europe, has to buy oil from third parties because it produces less oil from its own fields than the amount of petrol, diesel, jet fuel and other products that its refineries process each day.

BP last year reported a pre-tax and interest payments profit of $2.97bn from its trading activities in oil, natural gas and power. This trading profit formed a significant part of BP’s 2005 net profit of $22.3bn.

“Most of the majors trade oil to balance their own systems, whereas BP are far more ambitious. They look at trading as a profit-generating centre,” says a senior oil trader at a London-based company.

ExxonMobil has a different approach to trading. Its US Securities and Exchange Commission filings state: “The corporation does not engage in speculative derivative activities or derivative trading activities, nor does it use derivatives with leveraged features.”

Crucially, traders say BP often uses the information it gleans from trading in the physical market to participate in the derivatives market, where it is trading with investment banks that do not have as much knowledge of the physical market.

“BP traders rely heavily on the inside knowledge that they have on the oil trading world,” says the person familiar with BP trading.

In the propane case, BP produced a document after its lossmaking foray into the market in January-March 2004. Entitled “Lessons Learned” the BP team hinted at knowledge that they had pushed the envelope, saying that the action “could increase the risk of regulatory intervention”.

“The potential [compliance] risks were unclear to those making decisions on the bench,” the document says.

The question remains whether BP’s trading behaviour will now attract the attention of Mr Levin, the Michigan senator, again.