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Kenya Pipeline faces threat of receivership over Sh4.6b

By | April 3rd 2011 at 00:00:00 GMT +0300

By John Oywa

It has been a tale of costly blunders, endless court battles and claims of blackmail and corruption. Even as Kenyans struggle to absorb the soaring fuel prices caused by the unpredictability and business wars in the oil industry, all indications are that the fiasco could worsen in the coming months.

With the continuing unrest in the oil producing Arab countries already affecting the pump prices, analysts say the domestic market could face more beatings if some of the disputes are not resolved.

For example, the Kenya Pipeline Company (KPC) – the State agency charged with the responsibility of transporting refined petroleum products from the port of Mombasa --– is facing liquidation following a Sh4.6 billion dispute with KenolKobil Oil Company Ltd.

Industry sources say the oil firm already working on legal papers to have KPC wound up and put under receivership over breach of contract.

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A flurry of communication between KenolKobil and the Kenya Pipeline Company, paint a picture of a controversy that could trigger a crisis in the oil industry.

Pending legal tussle

KenolKobil has written two letters to the State agency, saying its patience had run out and was considering moving to court.

One of the letters – from Sharpley Barret and Company Advocates for KenolKobil reads in part: "In terms of court orders of 27th January 2011, you were required to have deposited Sh4.6 billion on or before 10th February 2011. As at the date of this letter, some 27 days later, you have failed or neglected to deposit the said sum in a clear violation of the court orders."

The letter, dated March 9, added: "Our clients cannot hold their hands against execution indefinitely and this letter will serve to notify you of our client’s peremptory instructions to us to now enforce the award by way of execution including but not limited to the option of winding up Kenya Pipeline Limited and, or having an interim receiver appointed."

Industry players are jittery over the goings on between KenolKobil and KPC, saying it would be a disaster if the oil company’s request were granted.

"Imagine a scenario where the sole pipeline delivering fuel to parts of Kenya and neighbouring countries is put under receivership," says a lawyer who does not want to be quoted for professional reasons.

He added: "The oil industry is rotten. We are paying high fuel prices because of impunity in the industry. Kenyans should know what is happening so that they are not surprised."

The lawyer said the energy sector faces a crisis because some people at the Ministry of Energy were protecting certain individuals or firms responsible for the mess. He cited the Triton oil scandal in which Kenya Pipeline Company allegedly released petroleum products worth Sh7.5 billion to Triton Petroleum Company without authority of financiers.

He also gave an example of the latest blunder in the industry in which the National Oil Corporation (NOC) allegedly contracted a cash strapped third party with questionable financial ability to import 116,236 tonnes of diesel.

The firm failed to deliver the consignment, forcing a costly re-tendering. But KPC downplayed the looming crisis, saying it would resist attempts to have it wound up or put under receivership. In a statement to The Standard On Sunday, the company’s corporate commutations department said: "The award published on 10th December 2009 is not executable in the usual manner because the arbitrator had provided how the monies were to be recovered. KPC is appealing against the award and challenging its basis."

It added: "The court has no jurisdiction to vary this award to provide for execution for the amount of Sh4.3 billion on account of KPC’s failure to deposit the same as the court ordered. The impression that KenolKobil can execute and have KPC face bankruptcy proceedings and thus precipitate a petroleum supply crisis is misleading."

Arbitration award

The company further explained: "The effect of the automatic lapse was to leave the parties in the position they were since 10th December 2009 when the award was made and prior to the January 28/1/2011 ruling on stay of proceedings. The company is confident of the merit of its appeal and intends to pursue full legal redress through the court."

When reached for comment earlier on, the parastatal’s company secretary, Flora Okoth described the standoff as ‘nothing new’ saying it was being addressed through legal channels.

KPC was in December last year ordered by an arbitration tribunal to pay the oil dealer Sh4.6 billion for breach of an agreement in fuel storage by allowing the Triton Petroleum to use its Kipevu facility in Mombasa as a warehouse. The arbiter, Ahmednasir Abdullahi, ruled that by allowing Triton to use the facility to store its petroleum products four years ago, the parastatal had reduced the space available in the industry.

Court papers seen by The Standard On Sunday show that Abdullahi awarded KenolKobil (Sh3.03 billion) and a further Sh1.9 billion on grounds that the oil dealers had lost consumer goodwill, marketing campaign and financial goodwill.

In 2006, KenolKobil took KPC to court over failure to facilitate the berthing of various ships carrying its petroleum products and demanded Sh9 billion in damages.

It argued that according to the Memorandum of Understanding, no other company would be allowed to use the facilities during the duration of the agreement.

Besides the KPC, KenolKobil has also had a protracted legal battle with Kenya Petroleum Refineries Ltd over petroleum storage and distribution agreements that culminated in the oil marketer being denied the use of the refinery and a docking berth in Mombasa.

The Energy Regulatory Commission got sucked into the matter and eventually suspended KenolKobil’s trading licence.

The suspension came at a time the oil marketer went to the London arbitrators after the High Court ruled in favour of the refinery that had sued the oil marketer for Sh456 million in unpaid processing fees.

Kenya Pipeline Company KPC KenolKobil Oil Company petroleum National Oil Corporation Kipevu Mombasa
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