Loophole allows cartels to make millions in water-for-fuel scam

Rogue Kenya Pipeline Company (KPC) staff and oil marketers could be minting millions of shillings by selling water disguised as fuel with the cost passed on to consumers, a confidential report seen by the Sunday Nation reveals.

The water is sneaked into the oil pipeline system and later declared as “losses” every month — a burden carried by consumers who have to pay higher prices. The pipeline “losses” should ordinarily be petrol and diesel.

A forensic audit report on the pipeline system has revealed that more than one million litres of water passed through the systems in three months from March.

The oil marketers however collected diesel and petrol leaving the State agency with the water to declare as pipeline losses which are then loaded into the monthly pump prices by the Energy Regulatory Commission (ERC).

CONTRACT

In short, oil marketers not only collect fuel and leave the water to Kenya Pipeline, but are also compensated for the “losses”. Not so the consumer who pays for this.

Kenya Pipeline and the marketers have an agreement that allows for a loss of up to 0.25 percent of product passing through the system, creating a lucrative loophole for the cartel that exploits it to make millions of shillings without breaking a sweat.

The contract between oil marketers and the State agency provides a comfortable cover for the exchange of water for petrol and diesel to mint millions of shillings in return.

Staff at various depots intentionally record erroneous entries and drain out the water without verification, further inflating the possible amount of water sneaked into tanks to exaggerate the losses, according to the audit.

“There were huge amounts of water drained through the period under review without source or time when it came into the system. Failure of laid down procedures and equipment to detect presence of water in the tank. Possible malice or ill intent by the staff is not ruled out as drainage of water without verification could be abused by fraudulent persons,” says the report presented to Kenya Pipeline board in August.

WEAK SYSTEMS

Some staff have also ensured that the automatic tank gauging system cannot detect water, making it easy to keep the flow unnoticed.

Investigators also found faulty meters at the head office depot which have been giving oil marketers more product than they own in the tanks in suspected collusion.

Here an extra 500,000 litres of product was being given to marketers every month in what shocked the audit team who recommended disciplinary action against the staff involved.

A loophole involving the use of different measurement tools to receive and discharge fuel has been a key cash cow for the staff who even alter previously recorded volumes on accounting books, shows the audit.

So weak are the internal controls that auditors found it easy for one to open and close product discharging valves without the action being traced back to them.

“From interviews, it was evident that sealing of tank outlets/inlets was full of controversies between operations and security, and lack of procedures compounded it, exposing KPC to potential unauthorised valves opening/closing,” the audit notes.

WATER

A marketer who was hesitant to discuss the puzzle of water in the fuel pipeline system told the Sunday Nation on condition of anonymity that it is common practice for the ships delivering fuel to the port of Mombasa to carry some water as well for cargo balancing purposes.

It is some of this water that is loaded into the KPC terminals at Kipevu and channelled to other parts of the country.

“The meters there just count as long as there is fluid going through it, once your account has been updated to have such amount of product, you can then pick it from any KPC depot but of course you will not be going to pick water. I guess there has not been much noise since there is a compensation mechanism in place through ERC,” the marketer says, raising further questions about the role of ERC monitors at the depot.

The Kipevu depot is said to have received some 100,000 litres of water in five hours on May 1.

The huge losses attributed to the presence of water in the pipeline system is the latest puzzle to the over eight million litres of fuel that has been declared “lost” through the pipeline in the first half of 2018.

SPILLAGE

Fuel is also lost through another crafty cartel suspected to be working with insiders at the company to punch the pipeline and siphon product.

Incidents include last year’s diversion of the Sinendet-Kisumu line at Koru and the August leak in Kisumu after thieves punched the line to steal product.

The line spillages accounted for over three million litres of fuel between January and June. Another 2.3 million litres is said to have disappeared through evaporation.

The 0.25 percent allowable loss in the pipeline system means consumers can be made to pay for up to 18 million litres from its Mombasa-Nairobi line alone, which passes 830,000 litres per hour.

Its new 20 — inch line is expected to channel 1.9 million litres per hour by 2023, increasing the allowable loss and widening the possibility of declaring the “losses”.

On Saturday, KPC Managing Director Joe Sang said it is normal for water to exist in petroleum products since they have “hygroscopic” properties.

DAMAGE

Apart from dissolved water which he said may fail to separate from the product, Mr Sang blamed the high presence of water on a pipe testing exercise conducted on the new pipeline from Mombasa to Nairobi in March.

“KPC also introduced a substantial quantity of water (27 million litres) in the pipeline system in March 2018, as the recommended medium for commissioning of our new line (Line 5). Note this is in line with international practice when commissioning oil pipelines,” he said.

The 27 million litres of water used in the testing may, however, fail to offer a proper explanation since in June alone 25.7 million litres of water was drained from the system

The water-for-fuel trade revelations puts pieces to the puzzle on incidents where motorists received fuel with traces of water like it happened at a petrol station in Nairobi on September 28.

About 10 drivers who fuelled at the station were forced to return there after mechanical hitches brought about by the fuel believed to have had traces of water.

PROBE

Ten days earlier, 14 trucks were recalled at the KPC Kisumu depot after they had been loaded with water instead of petrol.

Mining Cabinet Secretary John Munyes, who visited the Kisumu depot a day after the incident, had promised a thorough investigation into the incident and action within two weeks.

Silence followed close to two months later. “We have set up a team to investigate and report in two weeks,” he said during the visit.

Water presence in the pipeline system apart from being an economic loss is also said to be both a safety and environmental concern.

The audit found that staff preferred draining the water at night, putting their safety at risk and allowing for questionable disposal of the water which may have traces of oil.

Last year, the oil marketers through their supply coordination secretariat, Supplycor Kenya Ltd, protested loss of fuel at the depots with some 5.4 million litres said to have disappeared in the system then. The figure is much higher now.

“Marketers rely on Kenya Pipeline as a safe bank for fuel stocks while in transit to consumers. The unexplained fuel stock loss in the pipeline in now a major cause of concern and alarm.

"We seek and appeal for your intervention to stem the tide of fuel stock loss that is significantly eroding value in Kenya’s oil marketer industry,” read a February 2017 letter addressed to Petroleum PS and the Kenya Pipeline boss.