BP Products North America: The Propane Corner That Lost Money

The BP propane corner CFTC settlement required BP Products North America to pay a $125 million civil penalty for buying up deliverable propane, withholding supply and forcing other traders to pay inflated prices. BP expressly admitted the manipulation. For someone who knows a trading desk, the revealing part is how the company connected pipeline inventory, delivery obligations and recorded calls to a strategy for controlling the market.

The Commodity Futures Trading Commission’s action covered the February 2004 TET propane corner and an earlier attempt in April 2003. BP’s Houston natural-gas-liquids trading bench bought and sold propane for the company’s wholesale and petrochemical businesses and for speculative profit. Its traders entered contracts on behalf of BP Products North America. The October 25, 2007 consent order makes this one of the CFTC enforcement cases where the company’s own admission sits beside a detailed account of the trading.

How TET Propane Reached the Northeast and Midwest

TET propane was propane stored and transported in the TEPPCO system. That delivery network gave the corner its leverage. The order describes TEPPCO as the only pipeline carrying propane from its Mont Belvieu, Texas storage facility to the Northeast and Midwest, where residential and commercial consumption was greatest. Propane in other Mont Belvieu facilities, outside that storage and pipeline system, was called non-TET propane.

The timing mattered. Propane supplies were normally built during spring and summer, then drawn down during the winter heating season. February and March came at the low end of that inventory cycle. A trader estimating available supply had to understand how much propane could actually reach a buyer through that system.

TET propane traded mainly through direct deals, voice brokers and an electronic platform called Chalkboard, generally in lots of 1,000 barrels. Chalkboard displayed anonymous bids and offers. The parties learned each other’s identity after a trade. The Oil Price Information Service published prices for different delivery periods, including the current month, the following month and the next day.

OPIS also published daily and monthly averages using information from market participants. Contracts priced against those averages carried the effects beyond an individual trade. The order says published TET prices could affect both commodity traders and end users.

The April Attempt Taught the Desk How Much to Buy

The April 2003 attempt gave BP’s desk information it later used to estimate how much propane it needed to control. According to the consent order, the desk took a large long position, seeking to buy substantially all available April supply, hold it until the shortage raised prices, and then sell to traders needing propane to cover their obligations.

The desk booked a profit and learned what it believed was the pipeline’s minimum operating level, or dead stock. Combined with total TEPPCO inventory, that estimate helped the traders calculate the available physical supply and the contracts they would need to buy to corner it.

The bench leader’s recorded explanation of the February strategy makes the ambition unusually plain:

We see the point of that experiment clearly: learn whether the desk could dictate the price whenever it chose. The pipeline’s operating requirement had become a target for the trading strategy.

The February Plan Bought More Than the System Held

BP’s February 2004 plan was to buy available TET propane, withhold it, and sell some back at inflated prices to participants caught short at month end. The desk knew it would buy more than BP needed commercially or could sell during the month. It expected the inflated sales to outweigh a smaller loss on barrels carried into March.

The bench leader instructed traders to accumulate supply without arousing other participants’ suspicions. The desk kept watching pipeline inventory and its estimate of the minimum operating level.

Then the physical market moved against the strategy. A TEPPCO rupture in Ohio interrupted deliveries, leaving more propane accumulating at Mont Belvieu. Warmer weather forecasts reduced expected demand in the Northeast, and an import forecast pointed to more cargo arriving. The desk anticipated a substantial loss if it unwound its position. It bought more anyway.

By February 20, BP’s position exceeded propane in the TEPPCO system by approximately 1 million barrels. Later that month, traders sometimes refused to sell or even show offers while holding contracts for millions of barrels.

On the last trading day, February 27, BP bought more even though it already held contracts for more than the deliverable supply. It sold about 530,000 barrels that day. The remaining 4.4 million barrels went into March at a significant loss.

Control of the market. A losing trade.

Can the Commodity Market Be Manipulated?

A commodity market can be manipulated by controlling the supply other participants need to meet delivery obligations. In BP’s case, the consent order found that by midmorning on the last trading day, the company dictated the price and certain counterparties had no ability to bargain.

The recorded calls show what that meant to a buyer. A counterparty holding a short position asked whether there was any choice. A BP trader answered that there was not if the counterparty needed to cover. The buyer replied:

On Chalkboard, desk members also posted bids and offers, withdrew them in coordination and raised both, often after a single market transaction. In March, the desk refused late physical deliveries from counterparties caught short and required financial settlement using the artificially inflated OPIS high from the final February trading day. The price BP helped create followed those counterparties into settlement.

The World Federation of Exchanges’ 2024 working paper An Analysis of Market Manipulation Definitions Around the World places corners and squeezes among commodity-market practices that exploit market power. It also explains how commodity market manipulation can connect physical and derivative positions, with a price moved in one place and a benefit taken elsewhere. That is why the BP desk’s physical contracts, financial contracts and discussion of index prices belong together.

What Is the Penalty for Market Manipulation?

The civil penalty dwarfed the approximately $10 million loss the desk anticipated after the strategy ended. The Commodity Futures Trading Commission’s resolution also prohibited further manipulation and required changes to trading oversight. The order’s admission is direct: BP admitted that, through its employees, it conspired to corner the market and manipulate and attempt to manipulate February TET prices, and attempted to manipulate April TET prices.

The civil order required an independent monitor to examine trading surveillance, risk management and compliance training. It also required review of whether the compliance function had the authority, structure and resources to detect and prevent manipulation.

BP America was the company in the separate criminal proceeding. Under its deferred prosecution agreement, it accepted responsibility for its conduct in a factual statement accompanying the criminal charge, as the Justice Department’s account explains. The corporate civil admission and that criminal agreement concern the companies. The prosecution of individual traders had a different outcome.

Why Was the BP Propane Traders Case Dismissed?

The BP propane traders case was dismissed because the court found that the charged transactions fell within an exclusion from the Commodity Exchange Act under the law then in force. It also found gaps in the cornering and fraud charges. The Justice Department records that the Southern District of Texas dismissed all charges against four former employees on September 17, 2009. The traders’ dismissal did not reverse BP Products North America’s civil admission.

The Justice Department’s account explains why the fraud charges failed:

What Evidence Is Required to Prove Fraud?

For a physical-energy manipulation case, the evidence connects supply, delivery obligations, trades, prices and the desk’s purpose. In BP’s case, the consent order brought together inventory estimates, contract positions, recorded conversations, withheld offers and management’s response. The company’s own business review supplied another revealing connection.

After the strategy ended, management commissioned a review, including a presentation titled “Lessons Learned,” to examine why the strategy lost money and how to make it profitable. A slide compared BP’s physical position with available pipeline supply and showed the position exceeding available supply early in the month.

We find that response more revealing than another compliance policy. Management was studying how to make the corner pay. The order says a senior executive and the compliance manager became aware of a recording in which the bench leader called the trading a “squeeze.” Executives and the compliance manager failed to report the conduct or prevent its recurrence and delayed discipline until the Commodity Futures Trading Commission’s investigation, despite the trading violating BP’s written policy.

The Energy Bar Association’s 2017 Report of the Compliance & Enforcement Committee describes the practical weakness in relying on annual training and generic compliance tools without consistent monitoring and follow-up. Its account of a separate, later BP natural-gas case reports the Federal Energy Regulatory Commission’s finding that physical trading at Houston Ship Channel sought to depress an index to benefit larger financial spread positions. Different fuel and trading strategy, but the same reason to examine the physical and financial books together.

For a trader, scheduler, broker or compliance employee, the useful connection may sit between records that different teams see. An inventory estimate shows what could be delivered. A recorded instruction explains why the desk kept buying or refused a sale. The financial book shows what depended on the resulting price. We work with you to connect your knowledge of the business to those decisions.

How Do You Report Market Manipulation?

Start with our whistleblower experts and the trading story you know. We work through the market, the records and your role with you, and bring in CFTC whistleblower lawyers who understand physical energy trading.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. Commodity-market enforcement uses a different program: the Commodity Futures Trading Commission provides awards totaling 10% to 30% of qualifying monetary sanctions actually collected to whistleblowers. We work through which program fits the conduct you know.

You Know What the Desk Was Trying to Do

If you know why a desk kept buying, withheld barrels or priced a settlement the way it did, speak to one of our whistleblower experts about what the desk was doing. We build the case with you, match it with commodity manipulation whistleblower lawyers who understand delivery constraints and linked trading positions, and stay beside you throughout the case.