KACC asked to probe $98.7 million Triton oil theft at Kenya Pipeline

Saturday January 10 2009

Cracking the whip: Energy Minister Kiraitu

Cracking the whip: Energy Minister Kiraitu Murungi directed that KPC’s current external auditors immediately conduct a comprehensive forensic audit of all products held in the pipeline to determine its ownership. Photo/FILE 

By JAINDI KISERO

A day before the dramatic sacking of Kenya Pipeline Company Ltd (KPC) managing director George Okungu late last Friday, Energy Minister Kiraitu Murungi had instructed the Kenya Anti-Corruption Commission to move into the firm to investigate the circumstances under which millions of litres of petroleum held in trust on behalf of financiers and international traders were irregularly released to the troubled Triton Oil Company.

It is a scandal that has left several leading international companies involved in financing oil imports into Kenya, Uganda and Rwanda as well as the Kenya Commercial Bank — who had all financed Triton to import the oil — at risk of losing a whopping Sh7.6 billion ($98.7 million) as a total of 126.4 million litres was released to Triton without their authorisation or knowledge.

Sources told The EastAfrican that the minister made the decision to call in KACC after holding a crisis meeting with the directors of the pipeline company on Wednesday last week.

Mr Murungi also directed that KPC’s current external auditors be immediately engaged to do a comprehensive forensic audit of all product held in the pipeline to determine its ownership and find out whether what is held in the stores tallies with records held by oil companies and financiers.

Already, two officials from the company’s operations department had been suspended.

But the mood within the corridors of Nyayo House, where the ministry headquarters is located, as we went to press on Friday, suggested that the minister intends to cast the dragnet wide enough to include top decision makers at the company. Sure enough, he began at the very top.

At stake is the integrity of one of the region’s most strategic facilities in the oil sector — often described as the spinal column of the petroleum industry in East Africa.

Documents seen by The EastAfrican show that the international oil trading and finance companies at risk include Glencore of the UK, Fortis Bank, Bank of Holland, Emirates National Oil Corporation of the UAE and the Kenya Commercial Bank.

Mr Murungi moved into action as it emerged that KPC itself was also widely exposed in the transaction and was at risk of being sued by oil companies and financiers.

Although the pipeline company has yet to receive any quantifiable claim from the affected financiers, The EastAfrican has learnt that several banks and institutions have written to the company seeking to be told why and how their product left the KPC system without written approval by authorised signatories.

It is also understood that one of the financiers, KCB, has already fired off a letter to KPC threatening to take legal action.

According to informed sources, news of the scandal was reported to Mr Murungi on Monday last week.

The minister thereupon ordered Mr Okungu to prepare a detailed report and to convene an urgent board meeting to deliberate on the matter.

Dealings between KPC and oil companies are usually done through a system known in the jargon as a Collateral Financing Agreement.

A critical facility in the financing of the oil business, this agreement is what has made it possible for small players to participate in the oil industry.

Basically, it works in the following way: First, any oil marketing company that wants to bring oil into Kenya, Uganda, Rwanda or Burundi must advise KPC of the grade and quantity required and the financier of the product.

Second, the product is collected from KPC on the written authorisation of the financiers, which has to give names of its authorised signatories.

How Triton managed to collude with insiders to breach what until recently was regarded as a fairly secure system is perhaps the most intriguing aspect of the saga.

Obviously, the investigations by KACC will have to extend to oil companies and the relevant individuals within the staff of the banks who signed the letters of release.

According to available documents, Triton Petroleum signed a collateral finance agreement with KPC on July 4, 2004.

Former managing director Shem Ochuodho signed on KPC’s behalf, with Y.M Devani signing on Triton’s behalf.

Triton’s growth since had been at an exponential rate. Alarm bells rang in November last year when KPC was bombarded with letters from financiers demanding updated statements on stock inventories held in trust on their behalf and Triton’s.

Apparently, it was at this stage that it emerged that Triton had fallen back in payments to these financiers, while at the same time not apparently drawing down the oil it had ordered.

The game of deception had started in earnest. Junior KPC officials working in the operations department wrote letters to Kenya Commercial Bank, Glencore of the UK and Fortis Bank of France, providing them with false information to the effect that all was well and that the stocks were intact.

Although Emirates National Oil Corporation (Enoc) had also supplied Triton with substantial quantities of petroleum products, the company had not complained at that point in time.

KCB, Fortis and Glencore responded to the false information provided by KPC by directing that no more product be released to Triton.

Smelling danger, the top management ordered a fresh audit of stocks including reconciliation of what was being held in trust for respective financiers.

The audit was to reveal that all stocks, which ought to have been held in trust, had been clandestinely released to Triton between November 2007 and November last year with the authority of the financiers.

Consequently KPC wrote back to the financiers informing them that there were no stocks held for them in trust. Everything had been released to Triton.

In total, the volume of stocks released to Triton by KPC without written instructions amounted to 126.4 million litres.

Calculated at the rate of Sh60 (78 US cents) per litre, the total exposure comes to Sh7.59 billion ($98.7 million).