By Will Kennedy and Matt Leising — July 3, 2006 12:43 EDT

July 3 (Bloomberg) — The three BP Plc traders accused by regulators of attempting to corner the U.S. propane market lost $10 million when they failed to sell their inventory, court documents show.

The traders tried in February 2004 to make more than $20 million by controlling most of the propane in a pipeline network that ships the heating fuel from a hub in Texas to the U.S. Midwest and Northeast, according to transcripts filed June 28 with the U.S. District Court in Illinois by the Commodity Futures Trading Commission. Instead, they were stuck with much of the fuel when the market plunged on March 1.

«Not only do they have a public relations problem, they have a financial problem, said Charles Mankin, director of the Oklahoma Geologic Survey at the University of Oklahoma. «It backfired on them. The losses may be more of a deterrent against future attempts to manipulate markets than any action by regulators, Mankin said. BP on June 28 denied the allegations of market manipulation and said it had fired several employees.

BP, which made $2.8 billion trading oil and gas in 2005, and other oil companies are facing scrutiny from U.S. regulators and lawmakers as near-record oil prices have boosted gasoline, heating oil and natural gas prices to records in the past year.

`Control the Market

Mark Radley, a former BP trading manager who the Commodity Futures Trading Commission alleges developed the strategy, told his second-in-command that success or failure would show whether «we can control the market at will, according to transcripts filed with the U.S. District Court in Illinois.

BPs trades forced the price up to 90 cents a gallon, before it fell 34 cents on March 1, 2004. Propane for July delivery at the Texas hub traded at $1.1725 a gallon on June 30 and has risen 32 percent in the past year, according to Houston-based ChemConnect.

BP is also the subject of a grand jury investigation after a crude oil pipeline leak in Alaska, discovered in March. And in September, BP agreed to pay a $21.4 million fine, the largest ever imposed by U.S. safety regulators, for more than 300 safety violations that led to a March 2005 blast at its Texas City, Texas, refinery, killing 15 people and injuring more than 170.

BP shares were up 1.4 percent at 639.5 pence in London at 4:04 p.m. local time, after the company reported second-quarter oil and gas production fell 2.5 percent from a year earlier to 4.01 million barrels a day, the fourth consecutive quarter in which output lagged year-earlier levels. High energy prices allowed BP to repurchase $4.5 billion worth of its own shares during the quarter. It will report earnings on July 25.

Aware of Manipulation

Radleys second-in-command, Dennis Abbott, pleaded guilty to conspiracy last week. Radley, Abbott and another trader, Cody Claborn, were all fired for violating BP trading policies, according to the CFTC filing.

Radleys boss, James Summers, the vice president of natural gas liquids for BP Products North America Inc. Martin Marz, compliance manager for the units North America Gas & Power business, and Donald Byers, then chief operating officer for the unit, have been suspended since the CFTC named all three in its complaint, the Financial Times reported today, citing people familiar with the matter.

BP cant comment on the FT report or say anything beyond the statement on June 28, Jamie Jardine, a Singapore-based spokesman for the company, said today.

Summers, Marz and Byers were aware of the manipulation scheme, according to the Commodity Futures Regulatory Commissions complaint.

The propane trades caught the attention of other market participants, according to transcripts of telephone calls in which they accused BP traders of trying to corner the market.

`Hunt Brothers

One caller referred to BP trader Cody Claborn, who worked for Abbott, as Cody Hunt, a reference to the brothers Nelson and Will Hunt, who were convicted in 1988 of conspiring to manipulate silver prices.

Claborn responded: «What are you talking about man?

The caller, identified only as a market participant in the court documents, then said, «Someone told me you guys were trying to corner the TET market so I figured you were one of the Hunt brothers.

«I think youre badly mistaken, Claborn answered. «Who told you that?

Charles Mills, the attorney representing Radley, declined to comment. Attorneys representing Claborn and Abbott couldnt be reached for comment.

BP last week denied the trades were illegal. The Commodity Futures Trading Commission alleges the BP employees violated state antitrust and consumer protection laws.

`Feeding an Elephant

«We are reviewing what has been filed, but based on our investigation of the trades we have examined to date we believe that no manipulation of the market occurred, BP said in the June 28 statement. «That is not how we operate.

Marz, the compliance manager who approved the trades, told the traders at a February 2004 meeting to refrain from using the word «squeeze when discussing the strategy, the CFTC said.

Abbott, who pleaded guilty to conspiracy in a separate court filing by the Justice Department on June 29, was called by another gas trader on Feb. 19, 2004.

«Jeez, what is yalls appetite for propane? I mean, its just like feeding an elephant, the market participant said to Abbott.

«Um, yeah, we just like it, Abbott replied.

«You dig it, huh?

«Id call it insatiable right now, Abbott told the counterparty.

Inventory Peaks

BPs propane inventory peaked at 5.l million barrels, 27 percent more than planned, according to an internal company presentation posted on the CFTCs Web site, called «Lessons Learned and designed to determine how the experience might be useful in the future. The company had hoped to sell as much as 60 percent of that gas in February. It sold 17 percent, forcing it to sell the rest in March when prices fell by 34 cents a gallon, the document said.

«BP employees purchased enormous quantities of propane to establish a dominant and controlling long position, the CFTC said in its complaint. That caused propane prices to rise to more than 90 cents a gallon on Feb. 27, 2004, the complaint said.

«A price that would not otherwise have been reached under the normal pressures of supply and demand, the CFTC said. Propane gas is used to heat homes in the U.S. largely in rural areas without access to natural gas pipelines.

The «Lessons Learned document said the trades carried no regulatory risks, «but could increase the risk of regulatory intervention, the document said. There were no specific legal concerns. The «primary risk was to BPs reputation, the document said.

The same factors that led to alleged market manipulation of propane are at work in the U.S. natural gas markets, said Peter Huntsman, chief executive officer of Huntsman Corp. the U.Ss fifth-largest chemical maker.

«You have a handful of people who control large portions of the market, he said in an interview. «We need better oversight and more openness of these massive positions. Where is the oversight?

It took the CFTC two years to identify a problem, he said.

«I hope thats a wake-up call. The whole market for natural gas doesnt make any sense at all, Huntsman said, noting some production may be shut in the fall because of limited storage.

The case is U.S. Commodity Futures Trading Commission v. BP Products North America Inc. 06Cv3503.

To contact the reporter on this story: Will Kennedy in Singapore at wkennedy3@bloomberg.net

To contact the editor responsible for this story: Reinie Booysen at of rbooysen@bloomberg.net