Riddle of Sh1bn ‘spilt’ fuel at Kenya Pipeline that you might have to pay for

Kenyans have unwittingly been paying billions of shillings to cover up for theft of fuel at Kenya Pipeline Company in a scam that could have run for years.

The Nation is today revealing that the stolen fuel is accounted for as spillage and that, when insurers refuse to pay for it, the bill is passed on to the consumers via the Energy Regulatory Commission.

As a result, Kenyans have been financing a shadowy syndicate at KPC, until last month, when oil companies said “enough is enough” and refused to have the cost of 11 million missing litres footed by consumers.

SPILLAGE

KPC had told the oil marketing companies that more than 7.2 million litres were lost through spillage and another 4.4 million litres stolen at Koru, near Kisumu.

At best, this is a riveting fairy tale; at worst, an audacious lie.

At KM391, an obscure pipeline post nine kilometres outside Konza along Mombasa Road, KPC claims there was an oil spill on March 2, 2017, and that the company lost 224,000 litres. The Nation went to KM391 and found no evidence of such a spill.

KPC has also told the oil companies that use the pipeline that this year at KM392 and KM395, inside Lisa Ranch in Makueni — owned by former Head of Civil Service and Secretary to the Cabinet Philip Mbithi — it lost 1.97 million litres in yet another spill.

But the Nation was told by the Lisa Ranch farm manager, Mr Moses Parsaoti, that there was no such spill this year, yet KPC has been pushing insurance companies to pay and the ERC to pass the bill to wananchi.

MULTI-BILLION SHILLING SCHEME

It is not clear how long this fuel theft racket has been going on, but what is certain is that it could turn out to be a daring multi-billion-shilling scheme.

As a result, a row has emerged between KPC and all the major oil companies over the whereabouts of 11.646 million litres of fuel, worth over Sh1 billion, which the company claims spilt in the fields or was stolen in the last two years.

Suspecting foul play, 10 leading oil marketers wrote a joint letter on October 26, 2018, and informed KPC that they want to bring in their own technical experts from abroad to check the accuracy of stock statements issued by the corporation and get to the bottom of what is turning out to be bogus records of loss.

TWO OPTIONS

There are only two options on the table: either the insurance companies pay for the loss, or the bill is passed to the consumer by the ERC.

KPC has no fuel of its own and holds stock in its system on behalf of oil marketers.

Sources within the State corporation told us that the industry has refused to absorb the loss and the insurers are reluctant to commit themselves. That has left the management of KPC in a quandary as oil marketers demand their oil … or the truth.

Although the KPC managing director Joe Sang was not committal on who will pick up the tab in case the insurance companies do not pay for the “loss”, we now have evidence that oil marketing companies refused to have the loss passed on to consumers via the ERC, which has often been used to sanitise the losses.

INSURERS

Mr Sang told us he was waiting for the insurers’ decision: “The insurers appointed their own loss adjustors,” he said.

“They went to the spillage site to ascertain whether the amount recorded as lost was correct. At the moment, we are in the final stages of negotiation.”

The falling-out between KPC and the oil marketing companies happened on August 23 at the Serena Hotel in Nairobi, where they refused to accept the Sh1 billion loss. Minute 4 of the meeting indicates that the oil marketing companies refused to pay and resolved that the losses should neither be passed on to them nor to consumers.

It all started on July 5, 2018, when Mr Sang wrote a letter to Supplycor Kenya Limited, the independent legal entity incorporated by the oil-marketing companies in Kenya to coordinate activities along the fuel supply chain, notifying them that in the last two years a total of 11.646 million litres of fuel got lost due to “vandalism and spillages on the main line from Mombasa to Nairobi”.

COVERED BY CIC

In his letter, Mr Sang said that “these spillages are covered by CIC Company Insurance under the Industrial All Risks policy”, and that “the company expects the above losses to be compensated by insurance to the fullest extent possible and any balances not remedied shall be recovered from the industry”. But the CiC Group chief executive Tom Gitoho differed with Mr Sang, saying the company can only pay for “loss that meets the terms of our policy.”

Mr Gitoho said that after every incident reported, they “normally engage experts” to verify.

Mr Sang, while acknowledging oil marketers have demanded a forensic audit, said the company is ready for the audit, which industry experts say will reveal the “darkest secrets of KPC”.

“I don’t think it is a forensic audit per se; all they want is to confirm their stocks within KPC,” Mr Sang said. “We have told them they are welcome and we have nothing to hide.”

FORENSIC AUDIT

The ERC director-general Robert Oimeke has also written to Mr Sang urging KPC to liaise with marketers “for a forensic audit of the product loss”.

It is the first time that oil marketers are demanding a forensic audit after years of complaints that insiders have been fiddling with the system to record false losses which are then passed to the insurers or the mwananchi.

“This will, for the first time, allow Kenyans to have an independent audit of the rot within the organisation. Everyone is scared of the latest move by oil marketers,” says a source privy to the new demand by oil firms.

The demand letter, also copied to Petroleum and Mining Cabinet Secretary John Munyes, is signed by managing directors Joe Muganda (Vivo Energy), Goke Aluko (Total Kenya), David Ohana (KenolKobil) and Macharia Irungu (Gapco Kenya).

Others are Mr Duncan Murashiki (OilLibya Kenya), Mr Paul Limo (Gulf Energy), Mr Anthony Munyasya (Galana Oil), Mr Abdirizak Ahmed (Hass Petroleum), Mr Christian Callede (Oryx Energies) and Mr Hassen Zalgaonker (Engen).

The 10 directors have told Mr Sang that they would like to carry out the forensic audit within next month.

TERMS OF REFERENCE

In their terms of reference, they say they want to validate the controls around physical stock movement, but the bottom line is that they want to know what happens to their product once it leaves the ship in Mombasa.

The second issue they want to verify is the procedure used to allocate fuel and the metering of the product.

“If I pump a million litres from Mombasa, I expect a million litres is Kisumu,” a CEO of one of the oil marketing companies told the Nation.

The other most critical issue is the handling of the gain-loss.

“KPC is notorious for only declaring loss and not gains,” says an engineer privy to the KPC network.

Insiders say the demand for a forensic audit has caught KPC management by surprise.

“This audit will not only expose the scam of the oil price formula, but also the scandal of the 0.25 per cent provision that caters for any losses,” said a source close to the management.

FIDDLING WITH SYSTEM

Multiple sources have revealed to us that insiders within KPC have been fiddling with the system to record false losses, which are legally covered by the 0.25 per cent provision, and that, every month, fuel worth Sh250 million is sold out to some petrol dealers without raising any alarm.

Industry sources told the Nation that the insurance company demanded to see the police investigation report and argued that it is not possible to lose fuel worth Sh1 billion without causing an environmental crisis.

“This is equivalent to 291 tankers of 40,000 litres. KPC cannot show where the spillage occurred,” said our source.

A document sent to the oil marketers says that between March and June 2017, KPC lost 4.49 million litres of fuel at Koru after siphoning equipment was connected to an underground pipeline and fuel piped to a nearby petrol station.

ILLEGAL CONNECTION

In a statement Mr Sang had sent to newsrooms, he said the leakage had been reported on June 16, 2017 after KPC officials discovered an illegal connection with a network of pipes leading to a petrol station labelled Hess Energy Kenya some 100 metres away.

“We have a case in court which is ongoing,” said Ms Gloria Khafafa, the KPC Secretary.

While KPC has said that 1.5 million litres flowed into Prof Mbithi’s dam in the Kapiti plains last year, we could not independently verify the amount. Some workers who oversaw the clean-up say that all the water was pumped out into three tankers of 40,000 litres each, meaning only 120,000 litres could have spilt here.

The Lisa Ranch farm manager told us: “Haikuwa mafuta mingi. (It wasn’t that much). They cleaned up the dam last year and it is now in use.”

In total, KPC claims to have lost 4.8 million litres between KM391 and KM397, which is inside Prof Mbithi’s Lisa Ranch, in the last two years.

“Why, then, haven’t you repaired this section?” we asked Mr Sang.

“We have given the proposal to the Board to replace the entire pipe in Mbithi’s farm,” he said.

NGONG FOREST

KPC had told the marketers that there was a major spill in Ngong Forest in April and May this year, and that 1.2 million litres of jet fuel, kerosene and petrol were lost. KPC wanted insurance to pay for this too.

But the Cabinet Secretary for Environment, Mr Keriako Tobiko, said: “I am hearing it for the first time. There is nobody who knows about it. I have even talked to Kenya Forest Service and they don’t seem to know of such a spill.”

Mr Tobiko said that had it happened, it would have “caused an environmental crisis” at the forest. “We would even have made arrests,” he said.

A note from Kenya Forest Service says that in May this year KPC claimed that the line inside the forest had been drilled.

REPAIRS

“We visited the site and found them carrying out repairs on the destroyed pipeline. We never saw any spillage. On Wednesday (last week) there was another allegation of destruction of the pipeline. The forester was not informed and they felled some trees within the pipeline way leave.”

With no evidence of spillage of 1.2 million litres in Ngong Forest, the KFS says that “the destruction and theft of fuel could be an inside job by company employees”.

The forensic audit request comes at a time that KPC is in focus following revelations that water was passed through the pipeline system and accounted for as fuel.

Our informant now says that the water came from Line 5 during the commissioning of the pipeline. It is not clear why the water was not drained as per the procedure, but instead it was allowed to flow up to Kisumu, where 14 trucks that had gone to pick up oil were loaded with water.

It has not been explained why water was allowed to be part of the 94-million-litre line fill for Line 5.