How the deception game was hatched

The scale of the complex game of deception in the oil industry is still not clear.

Indeed the information the Kenya Pipeline Company (KPC) and the Ministry of Energy have provided is from an internal audit covering the period between November 2007 and December last year.

Chances are that the amount of money lost in the current deal involving Triton oil company will be much higher when the audit is stretched to July 2004 when the firm (Triton) signed the so-called collateral financing agreement with KPC.

It is also noteworthy that the figure reported by KPC was calculated at the conservative price of Sh60 a litre. The total amount of oil clandestinely siphoned off the KPC systems was 126.4 million litres.

But by the time these transactions were being done, average prices were in the range of Sh100 a litre. If you calculate at the price of Sh100 a litre, you realise that the fund at risk runs into hundreds of billions.

Didn’t cover

Furthermore, the internal audit by KPC did not cover what Triton owes other oil companies in respect of what is known as the Open Tender System.

If the proprietor of Triton Petroleum Company, Mr Yagesh Devani, runs to seek refuge in a country with which Kenya has no extradition treaty as is widely rumoured, many small oil companies may be forced into bankruptcy.

How he managed to breach what is regarded as a watertight system is perhaps the most intriguing aspect of the saga.

The starting point for the investigators will be the Operations Department, especially the people involved in the actual release of the product from the Kenya Pipeline system, the people referred to in Kenya Pipeline’s lingo as “schedules”.

Who instructed them to release the oil to Mr Devani? The dragnet will have to be cast wide enough to include commercial banks and to determine whether KPC staff were colluding with other oil marketing companies.

How the financiers agreed to hold so much oil within the Kenya Pipeline system for such long periods without detecting that something wrong was going on is yet another puzzle.

According to KPC’s internal audit report, the unauthorised release of cargo by Mr Devani went on for close to nine months without being noticed. Or were they colluding with Triton to hoard ullage at the expense of other players?

To understand how the game of deception was perpetrated, one has to understand how KPC’s collateral finance agreements work.

Briefly, this is how it works. When you bring your oil into the country, you must sign an agreement with KPC. This agreement states that oil within the KPC system can only be released with the authority and instructions of the financiers of that consignment.

It explicitly states that KPC shall release the type and quantity of oil only upon receipt of duly signed instructions from the financier’s authorised signatories.

It also obliges KPC to release regular statements on stocks held in trust at agreed intervals to the financiers.

The collateral financing system was introduced to allow into the industry independent players unable to import commercially viable quantities.

Mr Devani had come up with a scheme that allowed him to draw oil from the KPC system without paying for it.

He clearly took advantage of the fact that although KPC is at an advanced stage of implementing the SAP system, the modules expected to give live data on product accounting and stock movement are yet to be completed.

Until the investigations are complete, it is not possible to tell whether signatures were being forged or instructions were coming from the top to have the product clandestinely released.

As a matter of fact, the KPC internal audit report which unearthed the Triton scam specifically mentions cases where Ministry of Energy officials were calling KPC’s scheduling office directly to instruct them to release fuel to preferred oil companies.

Indeed, what emerges from a close scrutiny of the internal report is a system that was prone to manipulation. KPC has had no clear internal mechanism of authenticating information from financiers.

Letterheads

There were cases where releases sent via e-mails from financiers either did not have letterheads or were done on different letterheads. KPC was releasing oil based on documents that were manifestly inconsistent.

Lists of signatories for financiers were updated infrequently. Clearly, the system KPC put in place offered a perfect environment for shady dealings and corruption.

By exploiting the loopholes in the system, Mr Devani was now in a position where he could engage in “oil-kiting” — endlessly borrowing from Peter to pay Paul.

In the process, he incurred huge debts, only managing to mask his financial blemishes by siphoning money out of the Kenya Pipeline system.

In hindsight, and considering the volumes involved and the fact that the value of the transactions run into billions of shillings, the KPC system offered a good avenue for money laundering.

In 2006, Triton was among the firms named in Parliament as among the companies that received large loans from the troubled CharterHouse Bank in contravention of banking regulations.

Triton has also been an active player in the battle by the industry for the contract to supply oil to the emergency power producers, Agrekko, that is floated yearly by the Kenya Energy Generating Company (KenGen).

It has won the contract several times. Winning the contract was strategic because Mr Devani would then get the Ministry of Energy to order KPC to give his shipments preferential treatment in ullage space.

According to the evidence in the public domain, among the most exposed international creditor is Glencore International of the UK, one of the largest oil traders in the region. The company has had a long relationship with Triton.

There was a time when the big oil companies believed that Triton was but a trading arm of Glencore.

In early 2006, a major controversy erupted when oil majors accused Triton and Glencore of hoarding ullage space in KPC’s storage tanks at the expense of others- breaching the rule that says that ullage must be allocated according to market share.

Industry players alleged that Triton was employing political muscle to give it preferential treatment in the allocation of storage space.

During that period, many oil marketers were forced to buy from Triton as there was no space to store their own consignments.

For a long time, Glencore used to manage the contract to lift Nigerian crude on Kenya’s behalf. Under the arrangement, Glencore would sell crude provided to Kenya by the Nigeria National Petroleum Corporation, sell it elsewhere and remit the money to the National Oil Corporation of Kenya.

The contract was the subject of an investigation by Kroll Associates in 2003. It lost the contract when the Narc Government took over in 2003.