Fuel crisis looms in Sh7bn Pipeline fraud

The country’s oil industry was on the brink of a major crisis on Monday as the Government made frantic efforts to protect Kenya Pipeline Company from possible bankruptcy proceedings.

The pipeline is critical to operations of oil industries in Kenya, Uganda, Rwanda, Burundi and eastern Congo.

Three major international oil trading companies that finance petroleum imports into the region risk losing Sh7.6 billion after it emerged that unscrupulous KPC officials had colluded with the troubled Triton Oil Company to clandestinely release 126 million litres of petroleum products from the company without the knowledge and authority of the financiers.

KPC enjoys near monopoly in the transportation of petroleum products and cooking gas.

And the Government, on the heels of sending home KPC managing director George Okungu and chairman James Kenani, gave signs that more heads at the State corporation were set to roll in a clean-up exercise aimed at restoring credibility of the institution.

On Monday, one of the financiers, Kenya Commercial Bank (KCB) sought the intervention of Energy minister Kiraitu Murungi to recover Sh1.8 billion that it stands to lose following KPC’s decision to release 30 million litres of oil to Triton, now in receivership.

KCB managing director Martin Oduor-Otieno cut short his leave to meet Mr Murungi over the matter. The bank has moved to court to claim the money it loaned to Triton.

Other financiers exerting pressure on KPC are Glencore of UK, which risks losing Sh2.3 billion, Fortis of France (Sh906 million) and Emirates National Oil Company (Sh2.5 billion).

KPC is exposed, having breached an agreement with the financiers, which states that the company cannot release the stocks to Triton without their authority.

Quiet release

It has also emerged that KPC officials had tried to conceal their tracks by informing the financiers that their stocks were intact yet they had quietly released it to Triton.

A confidential brief prepared for Mr Murungi and seen by the Nation says that officers working under Mr Okungu had falsified records to show that the stocks were available.

But when KPC’s top management carried out an audit of stocks, it emerged that all the oil held in trust had been released to Triton between November 2007 and 2008 without the authority of the financiers.

“KPC wrote back to each of the three financiers — KCB, Glencore and Fortis — informing them that there were no stocks held for them in trust as they had all been released to Triton,” the document states.

It was then that KCB, after writing several letters without success, threatened to take KPC to court to recover its money.

Two officers have so far been suspended by KPC following the scandal that came to light last month as fuel shortages started hitting the country.

KCB has also sent home three officers over the issue.

Last week, the KPC board meeting with Mr Murungi expressed fears that the company could easily be declared insolvent if the financiers moved to court to claim their money.

“KPC faces a potential risk of being liquidated if taken to court by Triton financiers and found guilty of failing to manage the collateral financing agreement in accordance with its provisions,” said a document obtained from the ministry, on the implication of the Triton case.

The meeting resolved that, in the meantime, the company should not accept any liabilities related to Triton. KPC, it was agreed, should instead work closely with the financiers with a view to getting Triton to pay back the outstanding claims.

Following the scandal, the board resolved that all reports on stock positions to the financiers should be signed and sent by the managing director and not junior officers.

As a precautionary measure, the meeting resolved: “KPC in consultation with the Attorney General’s chambers should immediately engage a team of highly competent and experienced lawyers who among them should include commercial lawyers to review the matter and give a legal opinion and also prepare to defend KPC’s position in case the matter goes to court.”

After the board meeting, Mr Murungi invited the Kenya Anti-Corruption Commission (KACC) to investigate the matter, recover assets and prosecute those who were involved.

In a letter dated January 8, 2009, to KACC director Aaron Ringera, Mr Murungi said: “To speed up the prosecution of the persons involved starting with KPC staff already suspended from duty, I would also like to request that this investigation be undertaken jointly with the CID.”

On Monday, the minister declared that the events at KPC were a fraud. “This was purely fraud and that is why we have ordered that it be investigated. If Triton had not collapsed, this matter would not have been brought to our attention,” he said in his office.

To crack down on the scheme, which ministry officials said was being undertaken by junior officials at KPC, the board has called in PricewaterhouseCoopers to carry out a forensic audit of products held at KPC under the collateral financing agreement with various oil marketing companies to ascertain the authenticity of records.

The top KPC management held a meeting with Energy permanent secretary Patrick Nyoike over the issue at Nyayo House.

Later, the company’s board held an emergency meeting to seek a way out of the mess.

Step down

On Monday, Kenol Kobil Ltd stepped into the row and demanded the resignation of Mr George Wachira, the general manager of the Petroleum Institute of East Africa.

Kenol Kobil group managing director Jacob Segman argued that Mr Wachira could not distance himself from the activities at KPC, where he is a director.

“Kenol Kobil hereby requests you to step down from your position as PIEA general manager. Our stand is based on our conviction that you no longer credibly represent the oil industry being a director of KPC,” he said.

Mr Segman warned that should the general manager fail to respond positively to their demands, members would be mobilised to vote him out of office.

Mr Nyoike has stated that the ministry took action against Mr Okungu because he abdicated his responsibilities by allowing junior staff to handle matters that he should have dealt with.