* Oil trading sees fall in earnings in 2012
* BP says trading main reason for weaker downstream performance
* Reflects weak performance across global oil trading
BP's oil trading division, the alma mater for a generation of the world's top traders and a former cash-generating machine, is under greater scrutiny after becoming a weak link for the oil major.
The company says the unit, which once generated a tenth of profits, was responsible for its failure to fully deliver on a pledge to improve performance at its refining division.
BP last restructured its trading desk in 2010 to put more focus on fast growing markets in China and India, and denies more big changes are planned: "Major interventions are neither considered necessary nor are contemplated," it said in a statement.
But industry sources and former insiders say the weak performance has sparked an internal debate about the unit. The developments at BP, once the most powerful oil trading desk, highlight generally weak performances across many trading units at oil majors and trading houses over the past three years due to relatively low market volatility.
"If earnings drop too close to the cost level, the reforms debate will intensify," one former BP trading insider said.
Another former BP insider, now with a rival, said: "For the first time in a generation there is a debate, soul searching going on at their trading desk as people are asking questions - have we lost our competitive advantage?"
BP has not released separate figures for the performance of its trading desk since 2005, but in regulatory filings it noted that the unit disappointed last year.
"In March 2010, we outlined an opportunity to deliver an additional $2 billion of performance improvement by 2012 relative to a 2009 base-line," it said.
"We were unable to fully deliver this level of improvement principally due to a significant reduction in the supply and trading contribution in 2012 compared with a particularly strong performance in 2009."
BETTER PAID THAN THE CEO
Oil trading has been one of BP's most prestigious and high-paying divisions for decades.
The head of BP's U.S. crude business, a position currently held by Donald Porteous, is believed to be one of the best paid jobs in the world of oil trading.
"On a good year, the head of the U.S. book was making more than the CEO. Much more," one of several former insiders said.
BP declined to comment on traders' salaries. Chief Executive Robert Dudley's total pay fell 21 percent last year to $2.673 million.
Top management at BP also understands trading. Chief Financial Officer Brian Gilvary was head of trading between 2005 and 2010.
Like other European oil majors Shell, Total and ENI, BP has long had a big trading desk, which not only sells the firm's products and buys oil to meet refining needs, but also seeks to make profits on its own.
That contrasts with U.S. Exxon Mobil, which buys oil and products only to meet its needs and does not trade to make profits or use derivatives for hedging and other purposes.
BP's trading arm, like those of other oil firms, benefits from the information the company compiles from its control of producing, storage and refining assets.
For example, it controls large storage facilities, pipelines and a refinery in the U.S. oil hub of Cushing, Oklahoma, giving it big logistical and information advantages over competitors.
In the last three years BP has sold $40 billion worth of assets to raise cash to cover bills from its Macondo oil spill, including some U.S. storage facilities and refineries, but it says that did not hurt its competitive advantage in trading.
"We have continued to invest in facilities and contracts in the areas of the world most relevant to trading," BP said.
But trading volumes have largely been stagnant for the past few years, while rivals like like Vitol, Glencore and the trading arm of Shell expanded trading.
Between 2009 and 2012, BP's trading arm sold 2.4 million barrels per day of refined oil products while crude sales fell to 1.5 million from 1.8 million bpd. By contrast, total volumes at Vitol rose from 5 to 6 million bpd over the same period.
In 2007, BP paid $303 million in fines to settle criminal and civil cases related to manipulation of the U.S. propane market. It also had an independent monitor sitting on its trading desk for several years.
The big restructuring of the trading unit in 2010 saw it set up separate oil and gas trading desks.
Overall trading head count has remained stable over the past 12 months, according to its reports, although about 300 posts have been cut from the gas desk and a similar number added to its oil desk. It now has 1,800 staff in oil and 1,200 in gas.
The last time BP disclosed figures for trading, in 2005, it earned $2.97 billion, or over a tenth of the firm's overall net profit.
People familiar with the trading division's performance say 2009 was the last year of such truly impressive success. Crude, products and gas trading made $1 billion each amid soaring oil prices. As prices steadily rose, a market-forward price structure made storing oil profitable. Costs in the division stood at around $1 billion.
But the following years were more difficult, insiders say. Earnings from oil products trading halved in 2010 after a loss on fuel oil as core traders left. The situation improved in 2011 but last year saw a further decline across the board.
BP now includes trading in its consolidated figure for its downstream division, which has had widely varying results, ranging from 3 percent to 15 percent of the firm's total core earnings over the past four years.
In its annual filings it has described trading's contribution as weak in 2012, stronger in 2011, weak in 2010 and "very strong" in 2009, when trading helped make up for sharp falls in refining profits in the downstream division.
Those swings have not come under serious investor scrutiny at BP, although some activist shareholders have raised questions about the advantages of large trading divisions at other firms.
U.S. Hess Corp said it would offload its energy trading arm, Hetco, and exit its retail businesses by 2015 after pressure from investors.