Detailed allegations by federal investigators that BP traders illegally manipulated propane prices in 2004 could hurt the oil and gas industry’s image at a time when consumers and Congress are upset about soaring energy costs and record profits.
Executives from BP PLC and other major oil companies have testified before Congress and stressed in TV interviews that today’s sky-high prices for gasoline and other fuels are the result of market forces beyond their control — not improper behavior on the part of industry.
“Well, that’s going to be a tough sell when you have headlines showing that they caught you manipulating the market,” said Phil Flynn of Chicago-based Alaron Trading Corp.
Even though a nine-month probe concluded last month by the Federal Trade Commission found no widespread effort by the industry to inflate gasoline prices, Flynn said “everybody is going to use this one incident as proof positive that the big oil companies are manipulating every market. It’s going to be guilt by association.”
The Commodity Futures Trading Commission said Wednesday that BP traders — with the consent of senior management — “purchased enormous quantities of propane to establish a dominant” position in the market and then withheld fuel in order to drive prices higher.
Details of the alleged scheme, compiled with help from internal company documents and recorded conversations, were outlined in a civil lawsuit the CFTC filed against BP Products North America Inc., a Warrenville, Ill.-based unit of London-based BP PLC.
BP denied any wrongdoing, but a former employee admitted taking part in a conspiracy and agreed to cooperate with criminal prosecutors.
BP has faced considerable negative publicity in the past year.
The Environmental Protection Agency launched an investigation into a March crude-oil spill at one of its Alaskan facilities and it faces victims’ lawsuits stemming from a deadly explosion last year at its Texas City, Texas-based refinery.
Earlier this week, a group of prominent black leaders including the Revs. Jesse Jackson and Al Sharpton announced a boycott of BP, saying the company gouges consumers and racially discriminates in its business practices. The company was targeted, Jackson said, because none of its upper-level executives are black and there are no black owners among its hundreds of U.S. distributors.
The alleged price-manipulation conspiracy generated sharp criticism from experts and politicians.
Senator Charles E. Schumer (D-N.Y.) said that “if these charges are true, it shows the worst of big oil ... consumers deserve free markets that reflect true prices.”
Robert G. Hansen, the associate dean at Dartmouth’s Tuck School of Business, said it appears that “a corporate management failure occurred at BP” and that, with energy markets facing such a high level of scrutiny from the public, “management has to have the utmost control of their trading groups.”
BP spokesman Ronnie Chappell said “market manipulation did not occur” and that the company intended to fight the charges in court. However, Chappell said an internal investigation conducted by BP found that several employees failed “to adhere to BP policies governing trading activities” and that they were dismissed from the company.
“We have also taken steps to strengthen the supervision of our trading activities,” Chappell said.
According to the CFTC lawsuit, which was filed in the U.S. District Court for the Northern District of Illinois, the plan to manipulate prices and pump up profits began to take shape in early 2004 amid declining propane prices that were particularly painful to BP because its traders had made significant bets that prices would rise.
The CFTC paints trading manager Mark Radley as a key architect of the plan to turn the situation around and potentially net the company $20 million in profit. Radley and others formulated a strategy to establish a massive position in the propane market in February 2004, the lawsuit contends, and he was recorded in one conversation as saying “we can control the market at will.”
Flynn said it was “ridiculous” for traders at a company the size of BP, which had profits of nearly $16 billion in 2004, to be engaged in such activity.
“It’s sort of like Bill Gates going out and shoplifting a package of bubble gum,” he said.
By the end of February 2004, BP controlled almost 90 percent of all the propane delivered on a pipeline that stretches from Mont Belvieu, Texas, to consumers as far away as New York, Pennsylvania and Illinois, investigators said. From the beginning of the month to Feb. 27, the cost of the liquid that is stripped from natural gas skyrocketed by more than 40 percent to about 90 cents per gallon — “a price that would not otherwise have been reached under the normal pressures of supply and demand,” investigators said.
One former BP trader, 34-year-old Dennis N. Abbott of Houston, pleaded guilty in federal district court in Washington on Wednesday to partaking in a conspiracy “to manipulate and corner the propane market.” Abbott, who has agreed to cooperate with law enforcement in an ongoing criminal investigation being conducted by the Federal Bureau of Investigation, faces up to five years in prison and a fine of $250,000, according to the Justice Department.
In addition to Abbott, Radley and the company itself, other current and former BP Products North America employees who face charges include: Donald Cameron Byers, the unit’s former chief operating officer; Martin Marz, the compliance manager; James Summers, the vice president of natural-gas liquids; and Cody Claborn, a propane trader. Abbott and Claborn were recently fired.
Aside from potential criminal charges, each defendant could be fined as much as $120,000.
In 2003, propane was the primary heating fuel for close to 7 million households, most of them concentrated in the Northeast and upper Midwest, according to the CFTC. It is a portable energy source for households beyond the reach of natural gas pipelines.