BP agrees to record settlement with CFTC, will pay other fines

Oct. 26, 2007
BP Products North America has agreed to pay $303 million in fines to settle charges that it manipulated propane markets in February 2004 and April 2003, the US CFTC announced.

Nick Snow
Washington Editor

WASHINGTON, DC, Oct. 26 -- BP Products North America Inc. has agreed to pay $303 million in fines to settle charges that it manipulated propane markets in February 2004 and April 2003, the US Commodity Futures Trading Commission announced.

It is the largest manipulation settlement in the agency's history, accord to Walt Lukken, CFTC's acting chairman. "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," he said on Oct. 25.

The settlement represents most of the more than $370 million that BP agreed to pay to settle a series of federal charges, the US Department of Justice said in a separate announcement. Other US subsidiaries of the multinational company will pay a record $50 million in criminal fines to settle Clean Air Act charges stemming from the Mar. 23, 2005, fire and explosion at its Texas City, Tex., refinery, and $20 million in criminal fines and restitution for violation of the Clean Water Act relating to oil pipeline leaks in Alaska.

"These agreements are an admission that, in these instances, our operations failed to meet our own standards and the requirements of the law. For that, we apologize," said Robert A. Malone, BP America chairman and president.

"They represent an absolute commitment to work with the government as we continue our efforts to prevent another tragedy like Texas City, to make our Prudhoe Bay pipeline corrosion program more responsive to changing operating conditions, and to ensure that our participation in the nation's energy markets is already appropriate," Malone said Oct. 25 in Houston.

Order's components
The Oct. 25 consent order with the CFTC requires BP to pay a $125 million civil penalty, establish a compliance program, and install a monitor to oversee its commodities trading activities. It also requires BP to pay $53 million into a restitution fund for victims, CFTC said.

Simultaneously, DOJ's criminal division fraud section filed a deferred prosecution agreement under which BP will pay a $125 million criminal fine and $25 million into a consumer fraud fund, CFTC said.

It explained that the TET propane market refers to propane deliverable at the Teppco storage facility at Mont Belvieu, Tex., or anywhere within the Teppco pipeline that runs from Mont Belvieu into Ohio, Illinois, and Pennsylvania. The system is the only one that transports propane from Mont Belvieu to the US Northeast.

CFTC investigators found that BP employees used the company's financial resources to buy more than the available TET propane supply in February 2004. By the end of the month, they controlled enough of the supply to dictate prices to other market participants and obtain a significant trading profit. They also found that BP employees attempted to corner the TET propane market in April 2003 by engaging in similar conduct.

"Although this case was difficult, our professional staff used strategic techniques during thousands of hours of investigation to uncover BP's misconduct. They effectively rooted out evidence of the defendant's intentions. This settlement shows that BP has decided to take positive steps to rectify the situation and provide relief to those citizens who were impacted by BP's misdeeds," said CFTC enforcement director Gregory Mocek.

In addition, a federal grand jury in Chicago returned a 20-count indictment charging four former BP Products employees with conspiring to corner and manipulate the TET propane market in February 2004, and to sell TET propane at an artificially inflated index price in violation of federal mail and wire fraud statutes, along with substantive Commodity Exchange Act (CEA) violations and wire fraud, DOJ said.

The federal grand jury charged Mark David Radley, James Warren Summers, Cody Dean Claborn, and Carrie Kienenberger with violating the CEA and federal mail and wire fraud statutes. Another former BP Products trader, Dennis N. Abbott, pleaded guilty on June 28 to one count of conspiracy to manipulate and corner the propane market.

"Our view of the legality of these trades changed as our knowledge of the facts surrounding them became more complete," said Malone. "This settlement acknowledges our failure to adequately oversee our trading operation. The agreement provides compensation for victims and establishes a foundation for working with the government to ensure our participation in the nation's energy markets is always appropriate. We are determined to restore the trust of regulators in our trading operations."

Bhopal provision
The $50 million fine stemming from the Texas City refinery explosion and fire also was the first prosecution under a CAA requirement for refineries and chemical plants to take steps to prevent accidental releases which Congress passed in 1990 following the explosion at Union Carbide's chemical plant in Bhopal, India, according to the US Environmental Protection Agency.

BP Products North America also agreed to plead guilty to a felony violation of the CAA and will serve 3 years' probation for failing to have adequate written procedures for maintaining the mechanical integrity of process equipment at the refinery and for failing to inform contractors of the hazards related to their occupying temporary trailers near the plant's isomerization unit. It also will complete a facility-wide study of its safety valves and renovated its flare system at the refinery to prevent excess emissions at an estimated cost of $265 million, EPA said.

"If our approach to process safety and risk management had been more disciplined and comprehensive, this tragedy could have been prevented," said Malone. "We did not provide our people with systems and processes that would have enabled them to appreciate the risk of a catastrophic release from the F20 blowdown stack and understand the danger of placing occupied trailers so close to it. We deeply regret the loss of life, the injuries, and the community disruption caused by the explosion."

A former EPA official applauded the penalties. "Let's hope these criminal fines wake up BP's management and force the company to clean up its refineries. BP spends a lot of money advertising itself as a 'green' corporation. Some of that money would be better spent protecting BP's workers and neighbors from the company's own pollution," said Eric Schaeffer, director of the Environmental Integrity Project.

Schaeffer also said that EPA and DOJ "deserve the public's thanks for this outstanding result."

For the Alaska oil spills from its North Slope gathering systems in March and August 2006, British Petroleum (Alaska) Inc. pleaded guilty to one misdemeanor of the CWA, EPA said. The BP America subsidiary will serve 3 years probation, pay $4 million to the National Fish and Wildlife Foundation to support North Slope research and activities, and pay $4 million in restitution to the state of Alaska. It also will be required to replace 16 miles of pipeline at an estimated cost of $150 million.

"This leak, and the spill that resulted from it, revealed a significant gap in our corrosion management program, a gap that existed because our approach to assessing and managing corrosion risk in these lines was not robust or systematic enough," Malone said. The company will work with state and federal regulators to assure that the Prudhoe Bay gathering system operate safely and reliably, he said.

Contact Nick Snow at [email protected].