Image caption BR vehemently denies the allegations and says it will defend itself

US regulators have told BP to respond to allegations of natural gas market manipulation and threatened the firm with fines of close to $29m (£19m).

BP has 30 days to respond, but said the allegations were "without merit".

The Federal Energy Regulatory Commission's (FERC) Office of Enforcement alleges the offences took place in the Houston Ship Channel from September to November 2008.

FERC first posted the allegations in 2011 and is stepping up its inquiry.

Fraud allegation

The regulator claims that BP's Texas-based Southeast Gas Trading desk bought and sold physical gas at the Houston Ship Channel and Katy gas trading hubs, in a way designed to increase the value of BP's financial position.

Specifically, it "alleges that BP accomplished its fraud by using transportation capacity between the two markets uneconomically".

But Geoff Morrell, BP vice-president and head of US communications, said: "BP natural gas traders did not engage in any market manipulation in late 2008.

"BP is disappointed that the FERC has brought this action and we will vigorously defend against these allegations."

'Out of context'

Mr Morrell added: "The FERC bases its allegations on a recorded two-minute phone conversation between a BP trainee and BP natural gas trader that the regulator has taken completely out of context.

"The recording does not support any allegation of wrongdoing. In fact, the trainee involved in the conversation states that his characterisation was incorrect and the trader never agrees with nor condones the trainee's statements.

"The trader also reacts strongly to the trainee's comments and interrupts him because the trainee's comments - as the trainee admits on the call - are incorrect and inappropriate.

"The trader also promptly reported the conversation and BP's compliance personnel acted appropriately in examining the trading at issue."

The total potential FERC fines include a penalty of $28m and $800,000 in profits and interest made in the alleged trading.

Recent muscle

FERC had its powers boosted in 2005 following the California energy crisis and the Enron scandal.

Last month, it settled a power market manipulation case with JPMorgan Chase for $410m.

It also recently brought charges against Barclays for $453m relating to alleged manipulation of western US energy markets.

Barclays has said it will fight the charges.