* Oil trading sees fall in earnings in 2012
* BP says trading main reason for weaker downstreamperformance
* Reflects weak performance across global oil trading
By Dmitry Zhdannikov
LONDON, March 14 (Reuters) - BP's oil tradingdivision, the alma mater for a generation of the world's toptraders and a former cash-generating machine, is under greaterscrutiny after becoming a weak link for the oil major.
The company says the unit, which once generated a tenth ofprofits, was responsible for its failure to fully deliver on apledge to improve performance at its refining division.
BP last restructured its trading desk in 2010 to put morefocus on fast growing markets in China and India, and deniesmore big changes are planned: "Major interventions are neitherconsidered necessary nor are contemplated," it said in astatement.
But industry sources and former insiders say the weakperformance has sparked an internal debate about the unit. Thedevelopments at BP, once the most powerful oil trading desk,highlight generally weak performances across many trading unitsat oil majors and trading houses over the past three years dueto relatively low market volatility.
"If earnings drop too close to the cost level, the reformsdebate will intensify," one former BP trading insider said.
Another former BP insider, now with a rival, said: "For thefirst time in a generation there is a debate, soul searchinggoing 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 ofits trading desk since 2005, but in regulatory filings it notedthat the unit disappointed last year.
"In March 2010, we outlined an opportunity to deliver anadditional $2 billion of performance improvement by 2012relative to a 2009 base-line," it said.
"We were unable to fully deliver this level of improvementprincipally due to a significant reduction in the supply andtrading contribution in 2012 compared with a particularly strongperformance in 2009."
BETTER PAID THAN THE CEO
Oil trading has been one of BP's most prestigious andhigh-paying divisions for decades.
The head of BP's U.S. crude business, a position currentlyheld by Donald Porteous, is believed to be one of the best paidjobs in the world of oil trading.
"On a good year, the head of the U.S. book was making morethan the CEO. Much more," one of several former insiders said.
BP declined to comment on traders' salaries. Chief ExecutiveRobert Dudley's total pay fell 21 percent last year to $2.673million.
Top management at BP also understands trading. ChiefFinancial Officer Brian Gilvary was head of trading between 2005and 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 oiland products only to meet its needs and does not trade to makeprofits or use derivatives for hedging and other purposes.
BP's trading arm, like those of other oil firms, benefitsfrom the information the company compiles from its control ofproducing, storage and refining assets.
For example, it controls large storage facilities, pipelinesand a refinery in the U.S. oil hub of Cushing, Oklahoma, givingit big logistical and information advantages over competitors.
In the last three years BP has sold $40 billion worth ofassets to raise cash to cover bills from its Macondo oil spill,including some U.S. storage facilities and refineries, but itsays that did not hurt its competitive advantage in trading.
"We have continued to invest in facilities and contracts inthe areas of the world most relevant to trading," BP said.
VOLUMES STAGNANT
But trading volumes have largely been stagnant for the pastfew years, while rivals like like Vitol, Glencore and thetrading arm of Shell expanded trading.
Between 2009 and 2012, BP's trading arm sold 2.4 millionbarrels per day of refined oil products while crude sales fellto 1.5 million from 1.8 million bpd. By contrast, total volumesat Vitol rose from 5 to 6 million bpd over the same period.
In 2007, BP paid $303 million in fines to settle criminaland civil cases related to manipulation of the U.S. propanemarket. It also had an independent monitor sitting on itstrading desk for several years.
The big restructuring of the trading unit in 2010 saw it setup separate oil and gas trading desks.
Overall trading head count has remained stable over the past12 months, according to its reports, although about 300 postshave been cut from the gas desk and a similar number added toits oil desk. It now has 1,800 staff in oil and 1,200 in gas.
WILD SWINGS
The last time BP disclosed figures for trading, in 2005, itearned $2.97 billion, or over a tenth of the firm's overall netprofit.
People familiar with the trading division's performance say2009 was the last year of such truly impressive success. Crude,products and gas trading made $1 billion each amid soaring oilprices. As prices steadily rose, a market-forward pricestructure made storing oil profitable. Costs in the divisionstood at around $1 billion.
But the following years were more difficult, insiders say.Earnings from oil products trading halved in 2010 after a losson fuel oil as core traders left. The situation improved in 2011but last year saw a further decline across the board.
BP now includes trading in its consolidated figure for itsdownstream division, which has had widely varying results,ranging from 3 percent to 15 percent of the firm's total coreearnings over the past four years.
In its annual filings it has described trading'scontribution as weak in 2012, stronger in 2011, weak in 2010 and"very strong" in 2009, when trading helped make up for sharpfalls in refining profits in the downstream division.
Those swings have not come under serious investor scrutinyat BP, although some activist shareholders have raised questionsabout the advantages of large trading divisions at other firms.
U.S. Hess Corp said it would offload its energytrading arm, Hetco, and exit its retail businesses by 2015 afterpressure from investors. (Additional reporting by David Sheppard; Editing by WilliamHardy and Peter Graff)