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    3 views14 pages

    3.2 Chronological Review of CFA

    Uploaded by

    devna1
    accounting

    Copyright:

    © All Rights Reserved
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    Section 3.2 Chronological review of the CFA from its introduction in 2004 to 2008 when Triton collapsed PRICEWATzRHioUse(GoPERs @ Advisory Section 3.2 Chronological review of the CFA rom t nation fn 2004 to 2008 when Trion eallapsed Triton's arrangement with Glencore and the CFA arrangement enabled them to import large quantities of petroleum product from 2004 2004 + Intho early years of the CFA, there ware only two OMCs who actively imported product through the CFA, Le. = Triton ~ supplied andior financed by Glencore = Kenol Kobil financed by BNP Paribas (BNP) + We noticed a large Increase inthe volumes that Triton imported ‘ater going into the financing arrangement wilh Glenoore, The table below shows the increase In volumes Imported by Triton In the period 2003 - 2008 broken down by product . Triton white olls Imports from 2003 to 2008 ‘Volume of product imported in AP sp er ‘aco. ‘Seed seme eos 734393 67B.2874 190.3342 ooess4 307.054 3102436 9658 2878286 4849273 ‘75s 3142045, wrest 267.5620 Project Bahar «Forensic vestigation nia the adssttion of he CFA rangement 41 2005 ~ 2006 ‘Teton was by this ime importing large volumes of product from Gloncore through the GFA, The records obtained from the Pipeline Coordinator ("Pipecor”), on the Open Tender System (OTS) tender awards, indicate that Triton consistently won OTS tenders {0 import industry product for both crude and white cll. For an OMC of its size, this was a major achievement aa the records Irom Plpecor chow that previously the OTS product was ‘manly Imported by the larger multi-national ofl companies Including Kenya Shell Lid (Shell), Kobil and Chevron Kenya Ltd (Cattx). From our discussions with Mr. Kilonzo, during this ime, there was ‘0 restriction to ullage (storage space al KOSF) and Triton brought ‘in large quantities. The Imiling factor up until then for most OMCs. had been financing, and ullage had never been a problem until Triton started bringing in large volumes of product. Trion had ‘small market share with regard to throughput ino the Kenyan retail ‘market, and therelore major part ofits business involved Sourcing product to be cn-sold to olher OMCs at the Kipevu Oil Storage Facilities ("KOS"), Le, through Inter Tank Transfers (Te). ‘There were allegations within the industry that Triton wes favoured ‘by KPC In relation to ullage allocation. It was estimated at the time that almost half ofthe storage space at KOSF was occupied by Triton product. ‘According to Mr, Joo! Mburu, the Pipeline Coordinator, complaints ‘Section 3.2 - Chronological vi of the CFA om ts inrduetlon In 2004 to 2008 when Trion eotapsed In 2006 Triton together with Total won the tender to supply Kengen with AGO. They had a back to back financing arrangement which reduced their exposure to risk by OMCs regarding the ullage occupied by Triton In late 2005 and ing up of the Ullage +The ullage Issue led to the establishment of an Ullage Allocation Comrnitige that was setup by the OMCs to regulate the allocation of ullage amongst themselves. + Following the Increased volume of imports by Triton in 2005 — 2006, we understand from Mr. Cofn Otieno, tha former Business Risk & Stategy Manager at Triton and Mr. Jul Kilonzo, the former Supply and Operation Manager at Triton, that Triton made ‘considerable profits, as would be expected. + In the same period, Triton took on anther Financier, BNP to finance their Imports. According to Mr. Otleno, BNP had extended 40 Triton credit lines of US$ 140 milion n the form of a stuctured financing arrangement. This enabled Triton to finance large ‘consignments e.g, the erude cargoes which raquired financing in the region of US$ 60 millon each. + Tota, na joint agreeront wih Tton, won the tender to supp Kangen with dosol in Api 2006 (frst Kangen Supply Contract). This weroased te dominanes of Tefen in Kenya's ol industy. The agreement ebove was auch that Trton would source the product ‘and supply it to Total who would deliver it to Kangen. According to Wr otic Majokodunt ho MO o! Total, tho payment for ho product would bo made inti converse order, ce. Kengen would Fret pey Total who would non pay Tron. From our nterilw with reject Bane «Forensic smstigstion no the administration of tha CFA arengement 42 Mr. Otlono he stated that the frst Kengen Supply Contract was structured such that Triton hed two paral rangement wih Chevron Products Company (GPO) and Toll that afforded Titon & pack to back financing arrangement. ‘The agreement with Total aquired Titon to supply Total with product at an averege Plats price of (Mt), where M= the currant ‘month . Payment would be made by Total io Triton 60 days after delivery of product from Triton to Tolal. Tritor's contract with CPC ‘on the oer hand also provided Teton withthe financing cover at “Teton wore required to make payments to Chevron In respect of the suppllad product 60 days from the dato of davery to Tron (discharge of product into KOSF), so the financing gep used to be around 8 week or less. ‘According to Mr. Kllonzo, Triton used to delay thelr deliveries to ‘Total during this fret Kengen Supply contrac: and even on tho ‘subsequent contract by a month or mora. Itls however not clear ‘why Teton would delay their deliveries in thexe earlier periods a= they were covered by the back to back financing arrangements, ‘that would appegr to have shielded them from cash flow and price fluctuation risks. During this period, we note thal KPC was releasing encumbered product to Thton without the Financlers’ authority. This was ‘confirmed to us by Mr. Mutua who stated thatthe practica of ‘oloase of product bofore recelpt of formal Bank Releases startod ‘around December 2004. We however note that during this pertod, ‘Tilon would secure Bank Releases not so long after the ‘unauthorised release of product thereby rogularising the collateral ‘Seton 3.2» Chroncogla review of the CFA rom Bs rueton in 2004 la 2008 whee Trion cotepsed In 2007 Triton engaged more Financiers to fund their operations, ie. KCB and Fortis Bank, Their import volumes declined by 35% compared to the 2006 imports, but the actual volumes were still significant position in respect of the CFA-inancad product. + We also noted that during this porlod, thore were steff confit in Product Accounting function within KPC. For a whole year between July 2005 and July 2006, there was a conflict between {he then outgoing Ag. Chief Accountant Product (CAP), Ms. Anne ‘siting! and the then Ag. CAP, Ms. Agnes Njiru, + The unresolved staff Issues we observed may have contributed to the deterioration of the controls around tho CFA accounting! ‘administration within KPC. As a result of absence of proper hhandovers between the two and lack of clarty as to the functions | of the CAP, the Product Accounting function was not effective In the provision of the checks and balances that the unit was ‘supposed to provide. The Scheduling Unit was left handling al the administrative duties with respect te the CFA and all communications with Financlers without any monltoring or supervision, 2007 + 2007, Teton continued trading in large volumes of product However the volumes were dectining from the levele they had Imported in the pravious year. They stil had the Kengen Supply ‘contract with Total and they also imported quile a number of OTS cargoes. ‘+ From information oblained from the Pipecor, there wera 9 white Projet Boker Forensic vestigation Ino the admis of he CFA arrangement 43 oils cargoes and 7 crude cargoes Imported by Triton in 2007 as ‘compared to 15 white olls cargoes and § crude cargoes in 2006 (Appendix 15) Triton engaged new Financiers to complament Gloncore and BNP who had been financing them up (o this point. Fortis and KCB. ‘extended credit facilles to Triton which Mr. Otieno described as: ~ 8 composite financing arrangement with KCB where there. ‘was a US$ 25 million structured financing facility and a Separate USS 2 milion overdraft facity; and = 8 US$ 80 milion structured financing facility with Forils of which onty US$ 40 milion had been committed. ‘During this period, the practice of releasing product without Financler’s authority continued. Triton would trade with ‘encumbered product which was released by the schedulers at KPC who relled on oral promises from Triton that tw Releases for the released products would be forwarded at a later date. When Roleases wore obtained, the schedulers would then correct ir CFA eccounfs to reflect tha book balances, The table in Appendix 16 ~ (lable on ASE transfers vs Releases) shows ‘examples of just how this practice was prevalent, It would appear tobe some form of ‘teeming and lading". As alluded above, in our discussions with Mr. Mutua, he advised Us that he was releasing product without authorisallon from the Financiers as far back as 2004. Back thon, he said, the Releases would follow later as promised by Triton. “Section 22 « Chrnolglal review oft CFA rom ts reduction in 2004 to 2008 when Trion eniupsed The irregular releases progressively increased from approximately 40,000m? in January 2007 to approximately138,000m° in December 2008 + Our analyse of the time Iag between transfer of Triton's product via ASEs and receipt of Bank Releases confirms Mr. Mutua's assertion, We observed the delay in racsipt of oficial Bank Releases following regular transfer of Triton's encumbered ‘product via ASEs in the period under review to vary between one ‘week and one year, Below Is a graphical ilustration of ho ressive increase in the cumulative volume of the product released without the Financiers’ authority between end of January 2007 and December 2008. ‘Anaya of product inal appenr to nave been rlaused ‘nlhout approval fr the period Jan 2007 to Dee 2008 Ligne aan oat moe hee maa one Projet Bahar «Ferenlenvesgalin ito the aminisraton of tha CFA arangomoni 4 \We compared the volumes of product transferred in Triton's Enlitlment account as par the monthly ASE summaries in Ops 410, with tha Releases from Financiers n the same period to ‘assess whether the stipulation that preducts under CFA wera conly released by KPC upon receipt of @ Release from the Financiers hed been applied. ‘We assumed that all the product imported by Triton was under CFA, an assumpiion supported by both Mr. Olieno end Mr. {Kllonzo's confirmations in our interviews with them. ‘As advised by Mr. Mutua, prlor to the year 2008, Triton would tensure that Releasas due from the Financiers in respect of product released without authority were provided. He would then ‘update the CFA accounts upon recelpt ofthe Releases. ‘The taeming and lading was not immediately evident as the CFA accouns for the affected vossels/ships would have been ‘corrected by the time the next consignments arrived (please note that a CFA account is opened for each consignment, product, Finencior and shipper). Our review of the records indicate thet ‘Bank Released in respect of the cargoes imported before November 2007 had been recelved by KPC 28 at Decembar ‘2008. As such, although we noted some delays in the Release of the product vis-8-vis transfers of produc through ASES, as was ‘the norm, the CFA accounts belances for these cargoes had been reduced to zero, Our findings appear to negate Mr. ‘Okwengu's assertion that products were released without ‘authority only from July/August 2008 when he was on leave. Seciion 3.2 Chvoologes! review of CFA fom ts introduction a 2004 le 2008 when Tilon cotopsed Most of the product stayed in excess of 60 days without being released by the respective Financiers. KCB are yet to issue a Release in respect of a ship that discharged in February 2008 ‘Moreover, it confims Mr Mulua's statement that he had been releasing product betore getting a Release from the Financiers from as far back as 2004. + Atthe end of January 2007, Triton were ‘behind’ by 43,000m* in their pending Releases for Product already transferred, and this steadily Fose tc about 78,000m* at the year and (December 2007). + In.2008, the sltvation improved slightly In the early months, with the liability postion dropping {temporary to 70,000m* at the end of April 2008 before rising to the closing figure of 128,000m* 18 at the ond of 2008, * From cur review of movement of product within ‘Triton's Entitlement account, we note thet unilke the Bank Releases which would take a long tims to be Issued fo KPC, ASEs fstued by Trton to various OMCs and mainly Total (fr the Kengen ‘supply! would be offected within days of discharge of product into KOSF. Its this ‘mismatch that amounts to unauthorised release ‘of encumbered product to Triton. We analysed the time taken before issuance of Bank Releases {or selected cargoes in 2007 and 2008 for Private Imports and OTS imports. This is shown in the charts below: ‘lami of dato an Sanco ang ane Pr) ‘LL. se Duron ken or camp mlaae of 73 Produ SE EOS SE On a Pe ‘Tha aon as boos este othe dle of rembi- December 19 2008, Project Behe» Forensic Investigation into the adminaaton of te CFA erangement 45, ‘Section 9.2- Chronckglel review othe CFA from ka nection In 2008 102008 whan Ten else The second Kengen supply contract did not afford Triton the back to back financing arrangement they previously enjoyed, which may have contributed to their losses + The charts above Indicate a trand whera the 30 day evacuation period stated in the Acknowledgment Letter was not being adhered to, + ENOC have argued thatthe requirement Is not binding as It stated that “.u.The products ere expacted to be evacuated wilhin 30 deys of receipt into KOS..." + tis not clear why a Financler would have product staying unreleased for an entire year (KCB — Jag Pahel). We however, have not been availed any faciiy agreements between Triton and lis Financiers to be In position to comprahansively comment on, is. + We also notad quite significant delays In the Releases baing Issued by Financiers for OTS product. Though the OTS product ‘was paid for upfront to Triton before being uplited, we noted inatances whore the OTS product Releases would be almost two ‘months lale. It would have been expected that the Releases would hava taken a shorter time considering that payment is made ‘almost immediately. + However compared tothe other Imports, the turnaver ofthe OTS: product I terms of being released by Financiers was higher. Project Banas «Forensic Investigation into he adminevatin af he CFA arangement 46 2008 y ‘According lo Mr. Kilonzo, prior 2008, Titon was able to make good its fabiltles to Financiers lbelt ita at times. They continued delivanng product late to Total and continued making delayed payments fo their Financiers. According to Mr. Matin Lynch of Glencore, they noticed that ‘Triton was making late payments In respect ofthe expected repayments, but the money alvays came in eventually. 4112008, Teton imported lower volumes of product compared to the provious two years. According o Mr. Olena, they were fing it ificu, to get financing. In the course of 2008, BNP withdrew thelr financing to “Triton etng the fect that they did not understand thelr business model where it appeared thal Tion may have been speculating. BNP had also raised concerns as fo the fact that Trton's hock stock levels were ‘unusually high and showed less movement than expected. 4a 2008, Taton obtained financing at diferent periods of the year from BNP, Giencore, Fortis, KCB, Ecobank Kenya Lid (Ecobank) and Emirates National Oil Company (ENOC). During the early part of 2008, Le, January lo June Triton obtalned financing from Forts, KCB and Glencore. in that period, January to June 2008, Glencore supplied ‘Triton with 72,280.43MT of AGO under CFA, with the last dalivery made fon 29 June 2008. Triton then stopped making further supplies to Triton. ‘According to Mr. Lynch, they declined to finance Triton further and hed asked them to first exhaust the produc they had been supplied with eerller on before Glencore coud supply any fresh cargo. Most of KCB CFA financed product was for small amounts of ITTs from ‘other OMCs, mast of which were done in May 2008, ‘Soction 3.2~ Chronological review of he CFA om ha nrauetion n 2004 lo 2008 when Télonextpoed In the period January 2007 to December 2008, about 60% of the product transferred from Triton through ASEs went to Total + In.2008, prices of petroleum products had risen to thek highest levels peaking in July 2008. * During 2008, Triton renewod the Kengen Supply contract in conjunction with Total. The second Kengen Supply contract was signed in March 2008 and required Triton to supply Total with 24,000MT of AGO every month for onward dallvary to Kengen. Reclplonts of Triton products at KOSF between ‘Sanwary 2007 end Dacember 2008 * TOTAL CHEVFON MCRL a KEHOL OTHERS SHELL Project Saher - Forensic ivesgalin Ino te adinistatlon of he CFA arrangement 47 Triton’s trading was largely centrad on supplying Kengen through Total diesel for power production. From the chart above, its clear that more than hell the product ‘Triton transferred through ASEs at KOSF between January 2007 ‘and Decamber 2008 were primarily to Total. The other OMCs ‘accounted for far ess volumes of trade with Triton. This shows that Triion’s business was concentrated eround supplying product for the Kengen contract. ‘As was the case In tho previous contract, Triton delayed in their deliveries to Total, and according to Mr. Kilonzo, they would stlt deliver the product 8 month or more leter than was agreed in the Cconiracts between Triton and Total. Mr. Kilonzo advised thet during the period when the prices were rising, Total dd not object to the dolays. Mr. Mejekodunmi told us during our interview with Total officials that they did not mind the delays atthe time es it meant that they got the produet at much cheaper rates (M-2, M-3, etc) then the prevailing market price due to the rising prices, Ha advised thet Total would source product trom other OMCs or suppilers to deliver on their Kengen contract. Ho slated that Total had a KShs 65 million performance bond and therefore they were {forced to ensure timely deliveries to Kengen, When Triton was not performing as per the torms of the contract wilh Total, Mr. Torn Maganga, Planning and Suppiles Manager slated that they would indicate to Triton that they were running low ‘on stocks for suppiies to Kengen and that they would source the ‘product from other sources. The price differential would then be. Section 3.2 - Chronsoglalevew a the CFA rom is noducion n 2004 lo 2008 when Tin cola A drop in world oil prices coupled with difficulty in securing financing for their imports aggravated Triton’s cash-flow problems. as ships carrying their product were held up at the port for lack of finances. passed on to Triton. Mr. Magenga told us that TrRon never pald the price diference that arose as a result of Total being forsed to purchase product from a different supplier as a result o! Trton's ‘non performance. Mr. Meganga algo told us that Total decided In & ‘management meeting nol to pursue the matter any further because In thelr opinion Triton were not In a positon to pay. + Mr, Majekodunm told us that ideally they would have benefited {rom the delays In terms of holding gains, bul tha marghhs would ‘have been eroded by the purchases they made from the open, ‘markot fo cover for the delayed Triton deliveries. + To demonstrate how they may hava benefited from the delayed upplioa by Triton, wo cot out below an analysis ofthe potential price diference (gain) that Total could have mada as aresult of Triton's delayed delivery of product. Project Bahar + Forensc Investigation ino the adnsralion ofthe CFA artengement 48 Effect of delays In dolivery on the price of AGO deliverles to Kengen ‘Average Avorago Pitts price purchase prics on dale of delivery Average pice ett Monts uss cuss (sso, Jente 35 Feb08 e208 744 1535 Marae 2507 110835 208 A9r08 ans 43enn ams May.08 49762 22 370 unos 125t3 41040. (m2) 08 42073 toro (290) 09-08 2005 50-08, 11080 28 (2082) onta8 ‘183 se08 (278) Now08, 5548 r ‘Source ofinformalion: Purchase prices Toil and Pais prices fom —— Nock Mr. Majekodunmi confirmad Mr. Kilonzo’s assertions, and Total's records indicalg that Triton were parenoially late with their

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