IFC covered up Tullow’s Sh10billion illegal spending on Turkana Oil

Trucks transport crude oil from Turkana to Mombasa in early oil pilot scheme.

By Gitahi Ngunyi

The 2015 was a dramatic year in oil exploration in Kenya complete with intense boardroom wars, threats, ultimatums, and fire fights. The black gold squabbles were so intense that they spilled over to US Government’s Treasury and the World Bank Group offices in Washington.

It all started in the first quarter of the year when Africa Oil board members noted something unusual in the way Tullow was running the joint venture exploration project.

Triggering the fight between the two partners was a discovery by Africa Oil officials that Tullow had spent Sh10 billion on drilling wells without authorization of the joint venture board.

In other words, the Sh10 billion had not been planned and the expenses could not be verified. On learning about this illegal expenditure, Africa Oil officials hit the roof threatening to sue Tullow to recover the unauthorized spending.

To cool matters, Tullow which had been caught flatfooted offered to sacrifice its operational manager, Greg Smart who it blamed for overstepping his mandate.

But Greg sacking did not seal the Sh10 billion hole that Tullow had dug into the Joint Venture operations.

Africa Oil, the smaller of the two companies felt the pinch of the illegal spending and had to find ways to plug the hole before it became public and affected its share value.

It is important to note small companies like Africa Oil only get into oil exploration business for speculative purposes. Such companies thrive on trading their rights in oil blocks and their shareholding based. In other words, the company’s market value can easily plummet if word leaked out that the company has been losing money to illegal spending.

In an effort to plug the hole, Africa Oil board crafted a fire-fighting strategy which involved looking for an investor who would pump capital into the company.

For Africa Oil board, no investor fitted the bill better than World Bank private sector lending arm International Finance Corporation (IFC). The decision to settle on IFC as the potential was an easy one. IFC was already an indirect shareholder at Africa Oil through British government backed private equity firm Helios Investment Partners and was therefore in a position to understand the dangers that the oil company was facing if the Sh10 billion hole was not plugged in time.

With the question of the investor settled, the board worked out a proposal that IFC would not turn down. After weeks of back and forth between the board members it was agreed that IFC would be enticed with 6.62 percent direct shareholding in the oil firm in exchange for Sh5 billion to boost the firm’s capital.

What remained was for Africa Oil president Keith Hill to put the technical proposal together and deliver it to the IFC investment board in Washington.

In Washington, Africa Oil had its person in Lance Crist, IFC Global Head of Natural Resources. It was therefore legitimate for Keith to expect that the proposal would sail smoothly because of his personal relationship with Lance and also because of the indirect stake IFC held in Africa Oil held through Helios Investment Partners.

And true to Keith and the Africa Oil’s board expectation, the proposal sailed through after IFC officials were flown to Turkana for a field tour where they were entertained and hosted by Africa Oil Vice President for Operations, Mark Dingley.

According to our sources, it is Tullow that footed the bill for the IFC team tour of Turkana although Africa Oil acted as the hosts.

Our sources who are familiar with the tour told us that the IFC official seemed in a hurry to conclude the tour and never asked pressing questions on the state of the project particularly on the oil firm’s relationship with the environment and the local communities.

“IFC sent people who had no clue about oil exploration assessment. It is as if the funding decision had already been made and their coming to Turkana was a mere formality,” a source who was involved in taking IFC around the South Lokichar basin told this site.

However, there was a little hurdle. All major funding decisions by IFC have to be vetted by US government, because the country has the heaviest voting power at 24 percent.

US no vote

When the Africa Oil funding proposal to the US Government for approval, the US Treasury was surprised at how far IFC had gone to bend its own funding guidelines and decline to grant the approval.

“While the United States recognizes the potential transformational potential of the South Lockichar project, the United States is not comfortable with IFC’s equity investment in Africa Oil. Given its concerns regarding how this project has been presented to the Board, the United States opposes this proposed investment and wishes to be recorded as voting NO,” said the US Treasury.

The reasons cited for the rejection included the fact that IFC had given Africa Oil wide exemptions from crucial funding guidelines relating to the financial position of the oil firm, environmental and social impacts of the Turkana Oil Project on the local community.

On the financial position of Africa Oil, US Treasury was miffed by the fact that it wanted to increase its investment in a company that did not have cash flow.

“The United States is concerned by what it views as a lack of sufficient financial additionality. The United States notes that Africa Oil, a predevelopment stage company with no cash flow, is publicly listed on two separate stock exchanges, with a market capitalization of nearly $800 million (Sh80 billion), signifying ample investor demand given its potentially lucrative holdings. As such, the United States is not persuaded that the IFC’s investment is a necessary component of this project’s success.

Concerns  

But the bulk of US concerns were on IFC’s exemption Africa Oil on environmental and social accountability guidelines. US faulted the IFC top officials for not disclosing crucial documents on the risk posed by the project on the local communities and the environment.

“The United States is troubled by IFC’s lack of disclosure to the Board of key documentation that would have allowed a more thorough assessment of the risks associated with this proposed investment, which is all the more troubling given the project’s potential – together with that of downstream pipeline and port infrastructure – for significant impacts on critical habitats and marginalized communities,” said US Treasury in the rejection note dated July 9, 2015.

US flatly rejected the explanation that other Africa Oil exploration activities fell outside of IFC investment scope as a ground for exemptions on environmental and social impact guidelines.

“Given that this is an equity investment in a publicly listed company, the United States disputes the observation that aspects of Africa Oil’s other exploration activities, which may similarly be in critical habitats or land claimed by marginalized communities, fall outside the scope of the IFC’s proposed investment. The United States therefore expects that the IFC will closely monitor, and that the IFC’s policies will apply to all aspects of Africa Oil’s operations, and that the IFC will promptly provide the Board notice of any adverse environmental and social impacts stemming from Africa Oil’s operations.

In spite of the US protestation, IFC went ahead with the investment into Africa, closing it in August 2015.

In line with the Sh5 billion investment agreement, Tullow, Africa Oil and all partners are required to comply with the IFC performance standards on environmental and social sustainability.

However, our sources who are familiar with Tullow and Africa Oil operations have revealed to this news site that the oil firms are yet to comply.

22 grey areas

Documents we have looked show that the exploration firms are yet to comply in 22 areas. However, the critical areas of noncompliance include lack of free, prior and informed consent for land access and no measures in place to manage workers grievances.

Other sensitive areas of noncompliance are poor monitoring and reviewing of social and environmental and social impacts and lack of site specific environmental, health and safety plans.

The firms have not also put in place a sediment erosion control plan while their site rehabilitation has been graded as poor. At the same time, the oil firms have not established the process of documenting community profiles of the potentially affected communities’ exposure to risk and disease including the potential impact of project activities on communities

The question that still begs is why IFC was so keen to bend its own funding rules in the Turkana oil investment.  Given that the funding was finally approved, it is important for Kenyans to remember that IFC is bound by their own standards, governance and regulations to closely monitor, all aspects of Tullow (Operator) and Africa Oil’s operations, and that it will promptly provide the US Treasury notice of any adverse environmental and social impacts stemming from the two oil firms operations.

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