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The Wall Street Journal: BP Woes Deepen With New Probe

Public, Political Pressure May Rise
As Inquiry Looks Into Possibility
Of Manipulation in Gas, Oil Prices

By JOHN R. WILKE in Washington, ANN DAVIS in Houston and CHIP CUMMINS in London
August 29, 2006; Page C1

Federal investigators are examining whether BP PLC manipulated crude-oil and unleaded-gasoline markets, signaling a rise in regulatory scrutiny of the British energy giant, said lawyers and traders close to the case.

BP, which has been summoned before Congress next week over problems in its Alaska pipeline operations, already faces a civil complaint filed by federal commodities regulators for allegedly manipulating much of the U.S. market for propane. The separate investigations on crude oil and gasoline could intensify public and political pressure on BP because these markets are bigger and directly affect most American households.
The Commodity Futures Trading Commission has sent subpoenas to BP and energy traders in the crude-oil probe, which is focused on possible manipulation of the global over-the-counter market in 2003 and 2004, according to lawyers and traders who have been contacted or briefed in the civil investigation. (The over-the-counter market includes trades conducted over the phone or electronically in products not listed on exchanges, or in marketplaces that regulators can’t see.)

The separate gasoline inquiry, which has been under way more than a year and includes a criminal probe by the Justice Department, is examining a single day’s trading on the New York Mercantile Exchange in 2002, the lawyers and traders close to the case said.

A spokesman for BP in the United Kingdom said, “We are aware of investigations being done by the [U.S.] authorities and we are cooperating fully.” He didn’t elaborate on the nature of the investigation. People at other firms said many trading firms had received CFTC demands for information, suggesting that the investigation went beyond BP.

A CFTC spokesman declined to comment, saying the agency doesn’t confirm or deny investigations. A Justice Department spokesman also declined to comment.

In the broader civil investigation into crude-oil trading, investigators are examining, among other things, whether BP used information about its own pipelines and storage tanks at a key oil-delivery point in Cushing, Okla., to influence crude-oil price benchmarks that are set each day and influence billions of dollars of transactions. It isn’t related to the propane case, in which civil claims by the CFTC are pending against BP in federal court in Chicago, as well as a criminal charge against a former BP trader in U.S. District Court in Washington; numerous civil lawsuits seeking damages are also pending. BP has denied wrongdoing in the propane case.

No charges have been brought against BP in the crude-oil inquiry, and many such investigations are ended without civil or criminal charges being brought.

Indeed, an earlier CFTC investigation into BP’s crude-oil trading was closed without charges. In 2003, BP agreed to pay $2.5 million in a settlement with the New York Mercantile Exchange to resolve allegations of improper crude-oil trading. The settlement cited 10 oil violations in 2001 and 2002, which included wash trades, or simultaneous swaps of the same amount of a commodity for the same price. BP settled the matter without admitting or denying wrongdoing; the specific nature of the trades wasn’t disclosed.

With gas prices soaring, and congressional midterm elections a little more than two months away, federal regulators and law enforcers have been sharpening their scrutiny of oil-company conduct.

At the same time, House lawmakers are demanding that top BP officials appear before the Energy and Commerce Committee next week to answer questions about the Alaska pipeline problems; other lawmakers are pushing to give the CFTC more authority to police the market for off-exchange energy trading.

BP operates one of the world’s largest and most sophisticated oil-trading operations. In addition to trading physical oil and gas for its own operations, its traders participate in the energy-futures markets and provide risk-management services to energy producers and suppliers, refiners, shippers and other companies, much like a Wall Street commodities-trading desk. Its actions can affect the world-wide price of crude oil, natural gas, gasoline, propane and plastics.

The oil market involves the exchange of physical barrels of oil, trading on registered futures exchanges such as the Nymex, and unregulated over-the-counter markets. Barclays Capital recently estimated the nominal, annual value of all transactions — including physical, futures and over-the-counter — was some $40 trillion.

The key benchmark for oil trading is the futures contract for light, sweet crude oil on the Nymex, which is set for delivery at the terminal in Cushing, where BP has a dominant position.

Many oil deals in turn are directly linked to Nymex prices, while others are influenced by prices in New York trading.

While making commodity-markets trades on inside information about the company’s operations isn’t generally illegal, BP has warned the trading desk in the past to be careful about when it uses such information, says a person familiar with BP’s oil-trading desk.

For example, last year, when BP’s Texas City refinery had a deadly explosion that killed several of its workers, management immediately called the desk and warned them not to trade on the information. News that a refinery’s operations are damaged can push up oil prices because reduced refinery output reduces supplies in the marketplace.

Over the past year or so, the CFTC has sent out demands for information about transactions involving BP to oil-trading firms and Wall Street commodities desks, said several traders familiar with the requests. In addition, the agency has conducted informal, voluntary meetings with traders at some of these firms as part of its interest in BP and other oil majors’ trading operations, says a person involved in discussions organized for one firm.

Some of these same firms have also been contacted by the agency regarding the propane market.

It wasn’t clear whether BP was the only company the agency was investigating, say some traders knowledgeable about these inquiries.

However, many of the questions focused on the market for light, sweet crude for delivery in Cushing. A BP spokesman said, “We always assist regulators and other authorities in terms of helping them understand the facts around how our supply business works.” At the end of 2005, BP controlled as much as 30% of the available storage at Cushing — with some estimates of its holdings even higher — and its dominance of the crucial delivery point was a stumbling block to its buyout of Arco in 2000.

The Federal Trade Commission eventually forced the companies to sell certain assets at Cushing to avoid antitrust problems. But BP’s dominance remains a lingering concern.

In its inquiries to traders, the CFTC asked questions about whether it was common industry practice when a trader manages storage tanks or other assets and uses those assets in trading strategies.

For example, a trader at an oil company may buy a large quantity of oil on Nymex for delivery at Cushing, knowing that his company controls a large amount of the available storage there where light, sweet crude must be physically delivered at the end of the month. The trader’s identity is anonymous in such a situation.

A counterparty who decides to sell the oil may have trouble near the end of the month making actual delivery, if the oil company doesn’t make its ample storage available.

This could lead the counterparty to sell the oil to someone else at a lower price just to get out of the obligation to deliver it, and lead to a lower price on Nymex.

Meanwhile, the oil company that is a buyer of the oil at a higher price on Nymex may have a simultaneous bet in the over-the counter markets that will benefit from the price drop.

But the rules in oil trading aren’t as sharply drawn as in stock trading.

If a company used information available to insiders that others in the market didn’t have — such as the levels of storage at oil-storage facilities that are official delivery points for Nymex-traded crude — but used that information only to make a profit and not to influence the price, regulators would be unlikely to allege wrongdoing.

—- Bhushan Bahree in New York contributed to this article.

Write to Ann Davis at [email protected] and Chip Cummins at [email protected] and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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