Kenya’s state-owned National Oil Corporation (NOC) has failed to maintain required minimum operational stocks of petroleum products, violating energy regulations and potentially jeopardizing the country’s short-term fuel supply security, according to a damning report by Kenya’s Auditor-General.
The report, which examined NOC’s operations for the year ended June 30, 2023, found that the corporation did not meet the minimum stock levels mandated by Kenya’s Energy (Minimum Operational Stock) Regulations of 2008. These regulations require all petroleum importers to maintain specified minimum quantities of fuel “to ensure short term supply of petroleum products in the event of disruption of supply.”
“Management was in breach of the law,” the Auditor-General stated bluntly, highlighting the seriousness of NOC’s non-compliance with a key regulatory requirement designed to safeguard Kenya’s fuel supply.
This failure to maintain adequate strategic fuel reserves comes amid broader concerns about NOC’s financial health and operational effectiveness. The audit report painted a picture of an entity grappling with mounting losses, cash flow problems, and questionable management practices.
NOC recorded a pre-tax loss of KES 2.34 billion for the year, up from a KES 1.50 billion loss the previous year. Its accumulated losses ballooned to KES 6.84 billion, raising “material uncertainty” about the corporation’s ability to continue as a going concern without financial support from the government and creditors.
“The Corporation was technically insolvent,” the auditor noted, with current liabilities exceeding current assets by KES 9.11 billion.
Beyond its precarious finances, the audit uncovered several instances of potential mismanagement and irregular practices at NOC. In one case, the corporation was found to have irregularly spent KES 118.5 million from exploration grants on staff salaries and allowances, contrary to the approved work plan.
“The grants disbursed ought to have been utilized on exploration study for geology, geophysics, geochemistry, petroleum engineering, data packaging and marketing, software license annual renewal, community engagement activities and purchase of motor vehicles,” the report stated.
In another troubling finding, NOC paid out KES 62.3 million in “other allowances” to employees without proper documentation or approval from the State Corporations Advisory Committee. The auditor noted that “the basis for the payment of these allowances, and the applicable rates were not provided for audit.”
The report also highlighted concerns about NOC’s management of its retail operations. The corporation failed to conduct regular inspections and meter readings at its dealer-operated petrol stations between March and June 2023, potentially missing instances of “product dumping” where dealers purchase fuel from other suppliers.
“Management did not carry out monitoring, inspections and meter reading of the Company Owned Service Stations which are operated by the dealers to ensure that instances of product dumping are detected and fees charged,” the auditor observed.
Adding to the list of irregularities, NOC was found to have made a KES 2 million donation to a golfing society that was not in its approved work plan. The auditor questioned whether this donation benefited coastal communities as required by NOC’s production sharing contract with the government.
The audit also raised red flags about NOC’s information technology systems, noting that two main systems in use were outdated, increasing vulnerability to data loss and business interruptions. A KES 95.6 million contract to upgrade these systems was terminated in 2020 due to non-performance, leading to a legal dispute with the contractor.
In response to the audit findings, NOC management stated that it is working on addressing the issues raised. However, the corporation faces significant challenges in turning around its operations and restoring financial stability.
