BP Confidential

NGL Feb Value Trade

Lessons Learned
BP Confidential

February Trade Strategy

• Entering Feb, NAGP owned nearly 50% of 

physical propane bbls at the TET location

• Feb-March spread was trading at a 6 cent pr• Two key fundamentals led to the belief that 

Mar spread would widen by month end:

– Need to maintain a minimum inventory level of 

million bbls at TET 

– High level of imports hedged with paper TET sw

• View was that gulf coast propane would bec

short as importers went to the market to cov

• Strategy was to sell a portion of the acquired 

higher Feb price, rolling the balance to Mar
BP Confidential

TET Propane Inventory

TET System C3 Inventory

0

2,0004,0006,0008,000

10,00012,000

3/03

4/03

5/03

6/03

7/03

8/03

9/03

10/03

11/03

12/03

MBBLS

April/May 1.6 mlnheld

End Feb 2.1 mlnheld
BP Confidential

Feb-04 TET Hedged Imports by Loc

Gulf Coast: 2,741 MBBLS East Coast: 1,642 MBBLSMexico: 852 MBBLSTotal: 5,235 MBBLS
BP Confidential

February / March TET C3 Spread: 2003

Feb / Mar TET C3 Spread

05

101520253035404550

1/2

1/4

1/6

1/8

1/10

1/12

1/14

1/16

1/18

1/20

1/22

1/24

1/26

1/28

1/30

2/1

2/3

2/5

2/7

2/9

2/11

2/13

2/15

Date

Spread (cpg)

2003
BP Confidential

Expected outcome at trade entry

• Peak BP TET Inventory build: 4 mln bbls• TET Minimum Dead Stock: 1.6 – 2 mln bbl• Volume Sold in February: 40% - 60% (1• Feb/March backwardation: 20 – 30 cents/• Profit/Loss: - $5M to + $15

(20% chance o
BP Confidential

Possible Value of Trade

(30)(20)(10)-

10203040506070

10 20 30 4

Backwardation

MM $'s P/L

0% 20% 40% 60% 80% 100%

Expected Value o
BP Confidential

February 2004 Timeline

2004 Position Summary v. TEPPCO Inventory v. C3 Price

-

1,0002,0003,0004,0005,0006,0007,0008,000

1/5

1/7

1/9

1/11

1/13

1/15

1/17

1/19

1/21

1/23

1/25

1/27

1/29

1/31

2/2

2/4

2/6

2/8

2/10

2/12

2/14

2/16

2/18

(MBBLS)

TEPPCO Inv. Feb C3 Position Feb / Mar Spread

TEPPCO Pipeline goes down
BP Confidential

February Weather Summary

Difference in HDD 2003 vs 2004

-100

-50

0

50

100150200

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 

Day In February

HDD

Boston Washington DC Cleveland La Guard
BP Confidential

Actual Outcome

• Peak BP TET Inventory build: 4 mln bbls• TET Minimum Dead Stock: 1.6 – 2 mln bbl• Volume Sold in February: 40% - 60% (1• Feb/March backwardation: 20 – 30 cents/• Profit/Loss: ($5M) to + $15M (20% ch

-Peak BP Build: 5.1 mln bbls

-Actual Dead Stock: .7 mln bbls-Actual February Sales: 17% ( .9 mln b-Final Feb/March Spread: 34 cents/gal-MTM Trade Loss: ($10M)
BP Confidential

Possible Value of Trade

(30)(20)(10)-

10203040506070

10 20 30 4

Backwardation

MM $'s P/L

0% 20% 40% 60% 80% 100%

Expected Value o

Outcom
BP Confidential

Lessons Learned
BP Confidential

Trading Strategy

• Method to establish dead stock level flawed• Too much focus on year to year similarities, not enough on diff(e.g nat gas price)•Lack of system levers a significant disadvantage (e.g no TET mposition)•Transparency of TET inventory position (Inventory reports & O•Use of a potential weather hedge (short Z6 market)•Extend trading play across all TET grades•Spread limit on ability to short March/April•Aggregating group position in advance - critical•Use of index sales as opposed to fixed price
BP Confidential

Controls

• MVAR limit

– Calc’s based on 90-day volatility of Feb-Mar spread– MVAR averaged just over $1 M throughout March– No change in MVAR associated with trade strategy

• Calendar Spread limit

– Calculated based on minimum of net monthly longs – Calendar spread limited by net shorts not Feb length – Stayed within limit by increasing flat price exposure – Well within total flat price + calendar limit of 7 MM– Calendar spread limit prevented using additional shodownside protection
BP Confidential

Controls (Continued)

• Rolling unsold barrels

– Typical process for marking inventory is 100% at pr– Barrels that can’t be sold during the month are markduring the month, and then rolled at the end of the mon– Following this protocol would have shown unrealistidaily P&L – Bench chose to do 2 mid-month rolls rather than waiend of the month – These rolls were done manually, resulting in calculatthat had to be corrected several days later
BP Confidential

Compliance: Key risks

• Regulatory - No violations under curre

framework, but could increase the risk oregulatory intervention • Legal/credit – No specific legal conce

identified, but could increase the risk of “aggrieved short” failing to make paymfiling a claim for damages• Reputational – Primary risk. 
BP Confidential

Compliance: Lessons Learned

• Involve compliance group early. Only consult

initial play was on, and exit would have resultesignificant financial loss.• Education is required. The potential risks were those making decisions on the bench.• Reputational issues outside of NAGP should bconsidered and key stakeholders consulted.• A credit strategy is critical. As Feb price and vincreased many counterparties exceeded their creducing NAGP’s ability to liquidate physical i
BP Confidential

Communication with NGLBU

Primary concerns of BU:• Financial losses from trading

– BU was unaware of potential for a $10M – Not informed when “sizable” positions ar– Concerned over applicability of current D

• Reputational risk

– NAGP only consulted internal compliancno dialogue with NGLBU over compliance – BU is concerned about “regulatory issues– Having to answer customer questions
BP Confidential

Communication with NGLBU

Primary concerns of BU (continued):• Assurance that trading team has access to all information and optionality within the BU that used to increase chance of success 

– Information from within BU could have hNAGP better understand dead stock flexibi– Use of physical optionality within asset b

• BU Indirect financial impacts on business

– Did Feb price spike have a negative impaliftings which cost the BU money?To be discussed separately
BP Confidential

Actions going forward

• Peer Review – Done• Hire new NGL Risk Manager – Done• Compliance/regulatory training for NGL’s – R• Evaluating control “trigger points” that would 

necessitate discussion between NAGP and NGL

progress

• Implement weekly meetings with Marketing & 

to review trading positions and share opportuniPending

• Review NAGP DOA’s, establish clear accounta

implement improved communication protocols Pending
BP Confidential

Back-up Slides
BP Confidential

Residential & Wholesale C3 Prices

Propane Prices

557595

115135155175

1/26/04 1/28/04 1/30/04 2/1/04 2/3/04 2/5/042/7/04 2/9/04 2/11/04 2/13/04 2/15/04 2/17/04 2/19/04 2/21/04 2/23/04 2/25/04 2/27/04 2/29/04 3/

Date

Price CPG

Residential Wholesale
BP Confidential

February / March TET C3 Spread: 2003 v. 200

Feb / Mar TET C3 Spread

05

101520253035404550

1/2

1/4

1/6

1/8

1/10

1/12

1/14

1/16

1/18

1/20

1/22

1/24

1/26

1/28

1/30

2/1

2/3

2/5

2/7

2/9

2/11

2/13

2/15

2/17

2/19

2/21

Date

Spread (cpg)

2003 2004
BP Confidential

C3 Supply & Demand: 2003 v. 2004

(3,797)

(804)

(1,20

1,768

2,290

1,486

3,4

(2,029)

(5,000)(4,000)(3,000)(2,000)(1,000)

-

1,0002,0003,0004,0005,0006,000

Dec Jan 

2004 Chem Demand v. 2003 2004 Imports / (Exports) v. 2003 Net Supply 
BP Confidential

Position Summary

Feb TET C3 Position

-

1,0 0 0

2,0003,0004,000

5,000

6,000

Date

MBBLS

long feb/mar long feb c3/wti long feb feb c3
BP Confidential

Possible Value of Trade

(30)(20)(10)-

10203040506070

10 20 30 

Backwardation

MM $'s P/L

0% 20% 40% 60% 80% 100%
BP Confidential

Feb-04 TET C3: as a % of Crude

Feb-04 TET C3 as a % of Crude

60%70%80%90%

100%110%

12/1/03

12/8/03

12/15/03

12/22/03

12/29/03

1/5/04

1/12/04

1/19/04

1/26/04

2/2/04

2/9/04

TET C3 Average Max Min
BP Confidential

Mar / Apr C3 Spread

March/April Spread C3

012345678

1/5/2004

1/12/2004

1/19/2004

1/26/2004

2/2/2004

2/9/2004

2/16/2004

2/23/2004

3/1/2004

Date

Spread in cpg

Mar vs Apr C3
BP Confidential

PIRA C3 Inventory Chart: Total US
BP Confidential

PIRA C3 Inventory Chart: Gulf Coast