FERC Accuses BP of Market Manipulation

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On August 5, 2013, the Federal Energy Regulatory Commission (FERC) issued an Order to Show Cause and Notice of Proposed Penalty, directing BP America Inc., BP Corporation North America Inc., BP America Production Company, and BP Energy Company (collectively, BP) to show cause why they should not be assessed a civil penalty of $28 million plus $800,000 in disgorgement for manipulating the next-day, fixed-price gas market at Houston Ship Channel (HSC).

FERC’s order is based on a report by the Office of Enforcement (Enforcement) Staff.  Enforcement Staff concluded that, from September 2008 to November 2008, certain BP traders had a pre-existing spread position that included short index swaps at the HSC and long index swaps at Henry Hub. BP’s financial position benefited when the spread between daily physical gas prices at HSC and Henry Hub grew wider. As a result of Hurricane Ike, HSC gas prices plummeted, which resulted in the BP traders’ spread position suddenly having a potential to be worth millions of dollars. According to Staff, the traders then engaged in a scheme to extend that profit potential after the hurricane by increasing their HSC-Henry Hub spread positions and purchasing more physical gas for two months, in an effort to suppress prices at HSC.

Enforcement Staff’s Report alleges that: (1) the BP traders implemented a fraudulent scheme to suppress the HSC next-day, fixed price market, and that the relevant trades were uneconomic without justification; (2) the BP traders acted with scienter, as demonstrated by recorded conversations regarding the scheme; (3) the scheme involved FERC-jurisdictional wholesale natural gas sales; and (4) BP failed to appropriately investigate and analyze the BP traders’ actions and possible manipulation through its compliance program and procedures.

BP must file an answer with the Commission by September 4, 2013.  BP has the option to pay the proposed assessment or contest the order. The proceeding is captioned Docket No. IN13-15-000.

 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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