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Chinese firm bags Sh1.4bn for not drilling a single inch in Baringo County

Taxpayers have lost at least Sh1.4 billion after the Geothermal Development Company (GDC) cancelled a controversial geothermal contract handed to a Chinese company in 2014 to drill wells in Baringo.

In what makes the State corporation one of the biggest black holes in the energy sector, which continues to lose taxpayers’ money in the billions through fishy contracts, Smart Company has independently verified that GDC pulled the plug on the contract valued at Sh5.8 billion last month, more than five years after awarding it to Hong Kong Offshore Oil Services (HOOSL).

What is worse, GDC had wired the Hong Kong-based firm, whose top executive preferred communication using WeChat, Sh1.4 billion after bank guarantees expired, and failed to invoke provisions in the contract to recover the lost billions.

Two insiders at the firm, who are not authorised to speak to the media, confirmed the cancellation of the contract, but asked us to get an official comment from GDC chief executive Johnson ole Nchoe, who has been at the centre of action.

“I can confirm that the contract has been cancelled. The plan now is to do it (drill the wells) internally, but I cannot speak on this on the record for obvious reasons,” a manager at the firm who understands the intrigues around the contract said in an interview.

The insider said he did not know of any plans GDC has initiated to recover the money already paid out to the Chinese contractor.

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Mr Nchoe did not pick up our calls on Friday or respond to our text messages on how Kenya will recover the money sunk in the project where the contractor never drilled even an inch. He instead said he was bereaved and offered to respond this week.

However, his staff said he was at work the whole of Friday and was hosting top ministry officials in Baringo, the same county where the wells were to be drilled.

We reached out to HOOSL through its website last week. We asked it to clarify what will be the way forward on the project after the tender was terminated and its obligations following the contract cancellation and why it did not do its part of the bargain to save the Kenyan taxpayer from the losses.

Request for information

But the firm did not respond to our request for information by the time we went to press this week.

Earlier this year, the GDC boss had put on a brave face and insisted that the contract would be executed as planned.

It is not clear what caused the change of heart, exposing taxpayers to the losses after all that wait.

The delay in executing the contract saw both a performance bond as well as the Advance Payment Guarantee (APG) provided by Stanbic Bank expire last year.

Without the APG and performance bond, GDC will not be able to recover the money even after it was cancelled for non-performance.

But it is not just the loss of the money that is set to come to haunt GDC officials.

The recklessness with which the contract was handled paints a picture of a firm with a top management and procurement department that is either sleeping on the job or that does not have the interest of the country at heart.

GDC advertised the tender in 2014, a year after the 2013 General Election that gave the Jubilee administration its first term in office. HOOSL was given the award notification on November 10, 2014.

At the time of the award, there were several other contracts that were hanging on the heads of GDC officials at the time, some of which would later see its top bosses also hounded out of office and charged in court by the Ethics and Anti-Corruption Commission (EACC).

One of the contracts at the time, which had attracted the attention of detectives, was a Sh2.1 billion tender involving the purchase of an electrical rig awarded to Sichuan Honghua Petroleum Equipment.

Chinese entity

GDC had also given another Chinese entity, China Petroleum Technology and Development Corporation, an additional job in a contract worth Sh6 billion to put up three rigs after initially winning the tender for two in 2011.

The Sh5.8 billion HOOSL contract that would have seen the firm drill between 15 and 20 geothermal wells in Bogoria is the latest on the list.

The project was to be carried out near the Silali hills on the border of Baringo and Turkana counties as part of the strategy to move the country away from expensive thermal sources of energy.

Geothermal, which is cleaner and cheaper, was at the time the in thing and the government was pumping billions of shillings into GDC, to walk Kenya down that path.

The HOOSL project at Bogoria was hoped to inject about 465 megawatts (MW) of power to the national grid.

The Bogoria-Silali geothermal projects are expected to generate 300MW in Korosi while Paka and Silali were each expected to produce at least 100MW.

If these were achieved, then the country would have had enough power supply to knock off almost all the independent power producers that continue to supply expensive electricity, whose production costs are passed to the consumer.

Electricity prices

Kenya Power, which continues to push for increases in electricity prices, will have been given another pool of cheaper power to buy from.

A German-owned development bank, Kreditanstalt Fur Wiederaufbau (KfW), headquartered in Frankfurt, committed to fund the project at a cost of $58.5 million, which translates to about Sh5.8 billion at the current exchange rates.

But the money did not come. After waiting for more than one year after the contracts were signed, GDC decided to step in and pay Sh1.4 billion in September 2017, which is about 25 percent of the contract amount.

In return, it was hoped that the Chinese firm would now be enabled to mobilise its drilling equipment and deliver at least two rigs to the site and start digging. But HOOSL, after receiving the money in its account, went mute.

According to the contract, HOOSL was supposed to start work within three months after the advance deposit hit its accounts. But more than two years later, it was nowhere on site.

The work was estimated to take about 15 months and if all went as planned, Kenyans would have started receiving benefits from the wells some time last year.

Besides financing, one of the reasons given for the initial delay was related to a contract that was to pump water from Lake Bogoria to the construction site.

One of the biggest puzzles in the contract is why GDC failed to cash the performance bond after the firm failed to deliver or resort to any of the clauses that would have shielded the taxpayer.

As pressure mounted, GDC decided to move one rig from another site in Nakuru to Baringo in December last year, to buy itself time.

The rig transferred had been acquired early through an African Development Bank (AfDB) loan and materials to drill one well in Paka (PW-01) and another in Korosi (KW-01), the same site that HOOSL is required to drill the well, raising concerns on duplication.

Start drilling

HOOSL last updated on its website about the project on September 28, 2017 that after meeting with GDC in Nairobi, they were expected to start drilling at the end of November that year with the two rigs.

“GDC has completed the construction of the well site, pre-drilling work, well site water supplying and the road construction have been completed.

Therefore, the two rigs can be [delivered] to the site,” the brief posted on its website notes.

Again, the firm made another promise that it has not been able to deliver.

“The two companies are expected to start drilling at the end of November with the two rigs work simultaneously. The opening ceremony will be held on the day of drilling, and the leaders of both sides will be present,” the update notes.

The firm also said that before the start of the project, HOOSL will cooperate with GDC to “coordinate the relationship with local workers and peasants, and give adequate support to the reasonable conditions put forward by the local residents so as to make the project go smoothly”.

Correct physical location

The other major concern with the project was why GDC went ahead to award a contract to a firm whose correct physical location they did not even have, raising queries on the ability of the firm to conduct due diligence.
Four years into the contract, documents show that GDC was still pleading with HOOSL to furnish it with it official registered physical address in China.

On its website, HOOSL says it was established on February 27, 2008 with headquarters in Hong Kong.

“HOOSL is China’s leading integrated oilfield services & petroleum equipment provider, and a comprehensive oilfield service company which integrates project design, field operations such as drilling, completion services, drilling technique, equipment supply and rentals, logistics and warehouse etc.”

Not many companies in Kenya and abroad are given the same treatment on non-performance by the government. In fact, a majority first mobilise, show up on site, do a fraction of the work and generate a certificate before they are considered for any payments.

Despite the generosity of time and leniency, HOOSL would later turn on GDC to accuse it of all manner of ills.

They blamed the delay on GDC’s not providing it with rig site infrastructure information. The firm also claimed that some of their rigs had been corroded and confiscated by their manufacturer and that it has since lost over Sh1.7 billion in turn.

The killer blow was for the firm to ask for renegotiation of the commercial contract on the grounds that the earlier tender had been overtaken by events, which only means that the taxpayer would have to bear the extra costs.

This is not the only contract GDC has terminated in the recent past. The firm has also not been free of scandal and its officials came up on the list of shame, with some still fighting to clear their names in court.

Six managers at the company were also sent home for inflating rig-moving charges at the parastatal.

Terminating a contract

The firm came under attention of the Auditor-General for terminating a contract given to Bonfide Clearing and Forwarding Ltd, an action that had exposed the taxpayer to the loss of Sh3.3 billion in compensation claims.

GDC signed the contract with Bonfide in 2012 to move geothermal drilling rigs and other equipment in 40 lots, with each costing Sh42 million within a distance of 11 kilometres. The entire deal would cost the taxpayer Sh1.7 billion.

But the State corporation on September 13, 2016 issued a notice to terminate the contract, a move that saw the contractor put in a claim for Sh13.4 million for works done and Sh1 billion for loss of revenue on the remaining 24 rig moves.

The firm went to court seeking the money as compensation for work done, loss of business and damages.

GDC told the Auditor-General that the arbitrator dismissed Bonfide’s claim, save for a provable amount of Sh38.5 million.

But the auditor argues that the contract provided for a “prorated incremental” charge levy where the loads per move exceeded 50.

The services were, however, retendered in 2012 and re-awarded to the previous contractor in October 2012 for two years or 40 rig moves on a need basis, at Sh42,746,000 per move estimated to constitute 100 loads.

Whichever way all these cases go, there is only one loser at the end of it all, the Kenyan taxpayer.