Auditor General pokes holes in G-to-G oil deal

A recent audit of the Government-to-Government (G-to-G) oil deal has revealed anomalies in its implementation. 

In the 2022/2023 National Government Ministries, Departments and Agencies, Auditor General Nancy Gathungu said her office could not confirm the legality and effectiveness of the G-to-G oil importation scheme. 

During the financial year, the government made a policy shift on the importation of petroleum products for the local and transit markets from the Open Tender System (OTS) to the G-to-G framework.

The deal was meant to mitigate against the weakening Kenya Shilling that was attributed to Oil Marketing Companies (OMCs) operations and reduce pressure on foreign currency liquidity for the economy.

Documents relating to the importation of refined petroleum products revealed that the Government of Kenya, through the State Department for Petroleum, initiated fuel importation through the arrangement in March 2023. As of June 30, 2023, Sh267,722,538 compensations for stabilised refined petroleum products was agreed upon and recommended for payment.

Further review of documents provided in respect of the G-to-G arrangement for the importation of refined petroleum products revealed the government, through the Ministry of Energy and Petroleum, entered into agreements to purchase petroleum products from three OMCs in March 2023 under the G-to-G arrangement.

The auditor noted that the bilateral agreements governing the purchase of refined petroleum products between the Government of Kenya and the United Arab Emirates (UAE) were not provided for audit review. In addition, the Supply Purchase Agreements (SPAs) with the three oil companies supplying the products were not provided for review.

One of the oil companies was indicated in the MoU as wholly owned by the Government of Dubai. The second company was a free zone entity incorporated in the Fujairah Free Zone, while the third was a joint venture owned by three oil companies.

Article 11 of the MoU provided that it was non-binding.

Articles 15 and 16 of the memorandum provided that disputes will be referred to Dubai Court, which has exclusive jurisdiction over any dispute, and that the MoU will be governed by and constructed according to the laws of the United Arab Emirates. In this regard, Kenya, the audit indicated may be disadvantaged in cases of disputes arising from the MoU.

Article 3 of the MoU, the audit revealed, gave the responsibility of identifying and nominating the importers of bulk petroleum products to the Government of Kenya. However, a review of documents indicated that this was not adhered to.

Furthermore, the Master Framework Agreement provided for a price charge of the aggregate of Free-on-Board (FOB) price component, freight, and premium. The premium was given as USD 97.50 per metric ton. However, the premium was chargeable by the importer under the Open Tender System (OTS) terms, from which the framework is premised.

The report revealed that the premiums charged comprising USD 97.50, USD 114.25, and USD 118.00 for Motor Super Petroleum (commonly known as Super Petrol), Jet A-1, and Automotive Gas Oil (commonly known as diesel), were higher than those charged under the previous OTS.

“This implies that with a projected and contracted monthly supply of 930,000 metric tonnes for super petrol, for example, the premium payable would be USD 92,625,000 per month. It was not clear why the premium was included in the framework agreement with the supplier, the basis for the premium set, and whether the input of the buyer was sought before the premium amount was set,” read the report.

Articles 6 and 7 of the MoU, according to the audit, provided that the parties were to establish a Joint Steering Committee and a Joint Working Group whose functions, among others, were advising the governments on appropriate strategies for smooth implementation of the MoU, resolving any differences arising from the same, developing a framework for implementation and undertaking studies and sharing information to facilitate the implementation of the MoU.

“No documentary evidence was provided to indicate the establishment of the two committees, the framework developed by the Joint Working Group for the implementation of the MoU, and studies undertaken,” read the audit.

The auditor also questioned the role of the Energy and Petroleum Regulatory Authority (Epra) in the deal.

The audit showed that the letter of support for the three importers was signed by the Cabinet Secretaries for the National Treasury and the Ministry of Energy and Petroleum, and the Epra Director General.

“The Letter of Support to importers provided for the operation of a collection account and investment account. However, no documents were provided to indicate the existence, ownership, signatories, and particulars of the accounts,” read the report.

The aggregate supply qualified for all importers amounted to 730,000 metric tonnes per month, while the assessed national requirement was 950,000 metric tonnes. No details of how the supply shortfall of 220,000 metric tonnes would be met.

The Letter of Support indicated that the Government, through the National Treasury, would take responsibility for any funding shortfalls. The source of such funds or the existence of budget provisions to credit the financing parties for any shortfalls arising in the collection account was, however, not indicated.