Bapco adheres to highest standards of transparency

Bahrain’s national oil company, Bapco, reiterated that it follows the highest standards of transparency in business across the board.

Referring to the local media reports appeared on January 16 2013, with regard to the discussions of the Representative Council’s session held on 15 January 2013on the report of the Council’s Financial Committee in light of the National Audit Court (NAC) report.

The report refers to ‘violations’ by the Chief Executive of a government firm, reportedly exempting a client from paying US$ 2 million out of the agreed sum of US$ 3 million.

The Bahrain Petroleum Company (Bapco), owing to its continued obligation and adherence to transparency, would like to clarify all related circumstances and claims with reference to this issue, confirming that all measures taken were done so following detailed inspection, in order to primarily protect the Kingdom’s general interests, as well as safeguard its public money.

On 1 January 2009, an agreement was signed between Bapco and one of its clients by virtue of which Bapco was to supply the latter with 150,000 tons of diesel during the year of 2009. The client undertook to procure the contractual quantity in twelve monthly shipments of 12,500 tons each, at a predetermined price which was equivalent to the average prevailing rate in the Platts bulletin in the Arabian Gulf, plus an agreed premium of US$ 6 per barrel.

In early 2009, diesel prices plummeted in the international market resulting in a drastic reduction in the market diesel premium to below US$ 6 per barrel. As a result, the client did not lift the agreed quantity during January 2009, forcing Bapco to exert pressure on the client to meet their contractual obligations of lifting the agreed monthly quantity.

After repeated attempts of Bapco, the client managed to lift 12,094.43 tons during the months of February and March 2009 at the agreed contractual price. However, with the continued deterioration of the diesel market throughout 2009, the client failed to lift any further quantity, forcing Bapco to apply Clause 9 of the General Terms and Conditions which gives Bapco the right to sell the quantity unlifted by the client during the period of the contract. Accordingly, Bapco sold all the unlifted quantity of diesel in the spot market.

In view of the provisions applicable in such cases, if the unlifted quantities are sold in the spot market at a premium lower that that set forth in the contractual agreement between the two parties, the client will incur the difference between the agreed premium in the contract and the achieved premium in the spot market.

Since all the un-lifted quantities during 2009 were sold in the spot market at an average premium of US$ 2.63 per barrel which is lower than the agreed premium in the contract by US$ 3.37 per barrel, the client was obliged to incur this difference of US$ 3.37 per barrel, which amounted to a total of US$3 million. This amount was required to be paid by the client to Bapco.

As a result, the client was contacted and informed to settle the due amount at their earliest.

However, the client refused to pay the amount claiming that they were going through a financial crisis. They stated that, as a result of the financial crisis, they couldn’t get any loan facilities from banks in order to settle the payment with Bapco. Extensive correspondence followed between the client and Bapco, in order to amicably solve the issue, but unfortunately Bapco could not reach any satisfactory settlement.

Upon the request of the client, a joint meeting was held on 13 March 2011 at the Bapco premises in Awali. At the meeting, the client indicated their willingness to solve the issue amicably in order to maintain their business relations with Bapco. They proposed a settlement of US$ 1 million to be paid in monthly installments over one full year under the condition of closing the issue and waiving the remaining balance.

Bapco made several attempts to raise the settlement to US$1.5 to US$ 2 million, but the client adamantly refused, claiming that their business is undergoing a financial crisis due to the severe deterioration in the prices of oil products. In view of the above, Bapco sought the advice of its Legal Advisor in addition to seeking the advice of an external law firm. The legal opinion was as follows:

The cost of litigation at the British court as per the contract signed between the two parties which indicate that the British Law to be used in settling any arising dispute may reach up to 1 Million Pounds Sterling. Such an amount is equivalent to the minimum settlement claimed by Bapco.
The waiting period could be very long since such cases take several years to resolve, in addition to huge expenses being incurred.

There is no guarantee that Bapco will win the case, especially if the client declares bankruptcy. Under such circumstances, Bapco would be paid nothing by the client, in addition to incurring the litigation cost of over 1 million Pounds Sterling.

Based on legal opinion which advised Bapco to accept the client’s proposed settlement of US$ 1 million agreed to be settled over 12 months, Bapco is to take no further legal action against the client and subsequently close the case.

Bapco’s Executive Management’s approval was sought to accept the client’s proposal and close the issue. The client was notified, who then fulfilled his obligation and paid the amount of US$ 1 million in twelve installments, which ended in July 2012.

Bapco sought a third legal opinion after closing the case, in order to reconfirm that the measures and decisions taken were sound. The third legal opinion produced the same conclusion made by the former legal opinions, confirming that the measures taken were indeed sound.

Bapco would also like to point out that the settlement agreed was not due to the client’s failure to pay his due amount against buying oil products, but due to his failure to fulfill his contractual obligations of lifting the quantity agreed as per the contract signed between both parties.

Bapco has deemed it proper to explain the circumstances in full to the public after the issue was published negatively in the local media in a way that could harm the image of the company. Bapco has included all required details in its response to the report of the National Audit Court (NAC), with which the company has upheld the integrity and professionalism of its measures which have long been established over several decades.