Kenya Pipeline Company to pay for breach of agreement in oil storage

Kenya Pipeline Company will pay oil dealer Kenol/Kobil Sh 4.6 bn over a breach of agreement in fuel storage. This is one of the largest awards in Kenya's history and is likely to upset the finances of KPC as it plans major pipeline investment.
In a decision reached in December last year, an arbitration court ruled that the State corporation breached transportation and storage agreement by allowing the collapsed Triton Petroleum to use its facility, Kipevu, in Mombasa, as a warehouse. By allowing Triton to use the facility to store its petroleum products four years ago, KPC reduced ullage available in the industry. Ironically, KPC eventually allowed the bulk dealer to irregularly evacuate oil worth nearly Sh 8 bn to the detriment of creditors.

According to the chairman of the tribunal that chaired the talks, Mr Ahmednasir Abdullahi, Kenol/Kobil incurred losses and damages following the breach. The court also said that as a result, the oil dealer lost consumer goodwill, marketing campaign and financial goodwill.
The dealer moved to court in 2006 accusing KPC of failing to facilitate the berthing of various ships carrying its petroleum products, and demanding Sh 9 bn occasioned by the failure to allocate it storage space, commonly known as ullage. While accusing KPC of breach of agreement, the oil company said the deal was that no other company will be permitted to use the system in the transportation, storage and dealing terms so long as the agreement was in force.

The failure to allocate the storage space, based on market share, has in the past, forced big players to transport oil products by road, which raises the prospect of higher pump prices. Ullage allocation at the main storage facility at Kipevu has been dogged by irregularities, leading to mismanagement of the fuel storage system.
Several players in the industry moved to court last year accusing KPC of similar breaches in a scandal involving Triton. Kenol/Kobil complained that Triton, amongst other companies, occupied more thanits allocation, forcing ships to queue offshore before they could discharge fuel.

The Kipevu facility is normally used for short-term storage before pumping up-country, and failure by ships to discharge on time leads to delays in pumping. The arbiter also allowed a counterclaim of Sh 1.6 bn filed by KPC, but which was cancelled in the amount awarded to Kenol/Kobil.
The proceedings were initially conducted before Nzamba Kitonga, but were taken over by Mr Abdullahi after the latter was appointed to chair the Committee of Experts on the Constitutional Review.