Procurement of Offshore Petroleum Fuels

Published by the Government Accountability Office on 1971-09-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)


           Lt. General Wallace H, Robixson,      Jr*                     +%s 2 s 197%
           Director,  Defense Supply Agency
           Attention:   D&AH-cB6
           Cameron Station
           ~exandria,    Virg%nia 22314
           Dear General   Robinson:
                  The General Accounting Office has reviewed the pricing and            nis-
           tration of seven petroleum supply contracts awarded by the overseas Puel
           Division of the Defense Fuel Supply Center, Defense Supply Agency,
           Alexandria,     Virginia    (DFSC) to the Asiatic Petroleum CorporatAon,    The
           contracts,     totaling   about $384 tillion,    covered the supply, storage and
           transportation       of petroleum products in Southeast Asia for the years 1967
           to 1970 (see appendix).
                  Under the contracts, Asiatic delivered JP-k fuel, aviation gasoline,
           motor gasoline and diesel fuel to Vietmsm au& Thail~d      for Soverment use.
           The contract prices were negotiated on the basis that Asiatic would. bwy
           crude oil in the Persia Gulf or Caxibbeaun areas, ship it to Wngapore for
           refining,   and fkom the@e ship it to Vietnam ami T&11&! facilities     for
           storage and tistributioa    to the various tilitary services.
                  Contract prices were stated in terms of gallons, except for ns%scel-
            laneous charges.     In negot&at5ng the prices of the first five contracts,
            DFSC contracting   officials  deteminedl that the fuel prices were based on
            adequate competition or on market prices and did not request cost or pricy
            d.ng data. For pricing the last two contracts, DFSC requests8 certified
            cost or pricing data for certafn cost elements ad&e& to the fnel prices
            such as overhead, storage and inland transportation,       Asiatic provide&
            such data only for the last contract.
                  Cost or prlrcing data, however, were not requested by DFSC for the
            product portion nor the ocean transportation   charges on the basis that
            market prices were used to determine that contract prices were reason-
                     Ocean transportation   f'rom the source of crude oil to contractor
            facilities     in Singapore, prior to deliver to Vietnam or Thailand,
            accounts for a substantial        portion of total costs to the Goverment
            under these contracts.        This cost was included in the per-gallon pro&xt

                          --          50 TH ANNIVERSARY   1921- 1971
                                                                             -_-   - --

prices in each of the contracts awarded to Asiatic.  For most of the
contracts, it was estimated that 80 percent of the petroleum products
to be delivered would be blended or refined st Singapore,
      General-purpose vesrsels beerIng hQher rates per ton of cargo
normally are used to transport refined products, whereas med3umor
large vessels, normally are used to transport crude at lower rates.
The ocean transportation   rates used in contract negotfations we
reviewed were based on the use of published rates for general-purpose
vessels, the most emensive method of ocean transportation.       We esti-
mate that, in calen&r year 1969 alone, over $1 tillion      could have
been eliminsted from oceatj. transportation cost %ncluded in the negoti-
ated contract prfces if freight rates used %n the negotiations had
been based on a con&in&ion of 80 percent use of medium vessels for
crude oil and 20 percent u8e of general-purpose vessels for refined
       In commenting on this matter, DISC officials  ststed that, overall
the Co&r&& prices negotisted with Asiatic for petroleum product8
have been reasonable.    They indicated that any attempts to negotiate
a reduction in the ocean transportation   portions of the prices probably
would have been off8et by contractor-proposed price increases in some
other cost element. In our opinion, this rationale does not afford a
sufficient   basis for not attempting to negotiate transportatgon rates
consistent with the type of ve8sels that could be used.
      We recommend that DF'SCobtain cost inform&ion in support of its
estimates for ocean transportation   and conduct future price negotiations
for ocean transport&ion   costs using freight rates for general-purpose,
medium or large vessels in proportions they are likely to be used to
transport estimated quantities of oil product8 from the acquisition
sources to Singapore.
       Our retiew showed that more effective adminietrs,tfon by BFSCof
contract provfsions could have resulted in savings to the &urrpmpent of
$395,000   a8 8hown below.
                                                      Estimated   8119ount
                                                       of overpayment
     Payment for higher priced gasoline
       than was actually futnished                      $2@7,~

     Overpayment for the transportation
       of fuel from Singapore to Vietnam                 1o3,m

     Credit   not obtained    for returned     cargo         20,000
     Contractor permitted to retain          overpayment
       for intransit   losses                                25,~

                      Total                                $395,~

Payment for higher priced gasoline
thanwas actually furnished
       Under the terms of the contract effective      October 1, 1966,
Asiatic agreed to deliver up to 63 million       gallons of aviation gaso-
line fkola the contractor's  Sfngapore facilities      to VTetnam and Thailand
during the period October 1, 1966, to June 30, 1567. The contract pro-
vided the gasoline was to oome originally       f2om the Carkbbeeu area. The
purpose of this provision was to enable the Dl?SCto meet a Department
of Defense requirement then in effect which established a miuimm dollar
emount of petroleum products to be purchased in the Caribbean.         Since
gasoline froa the Caribbean was more costly thau gasoline from the
Persian Gulf, the higher cost was included in the contract price.
       Reports by the contractor during the contract period show that
about k6.5 tillion     gallons of gasoline were delivered to Vietnam and
Thailand under the contract.        Of this anmuut, only 12 million gallons
were shipped from the Caribbean. Another k.7 million        gallons were in
the oontractor's    inventory in Southeast Asia when the contract became
effective.    The original    source of this gasoline could not be determined
froa available records.
      The remainder of the 29.8 tillion gallons was not obtained by the
contractor from the Caribbean contrary to the contractual   requirement.
The Government paid the higher price as though the gasoline had come
from the Caribbean. Our coraparfson of the delivered prices fop @so-
line fkosn the Caribbean with those fmm the Persian Gulf, Aaiaticps
normal sourcaind%cated   that the Government fs legally entitled   to a
refund of about $2k7,OOO for gasoline not purchased fkom Caribbean
        Contract administration  personnel of DISC were aware that not all
the gasoline had been shipped from the Caribbean, The contracting
officer    suggested to the contractor,      in a letter dated August 11, 1967,
that a price reduetion for the non-Caribbean gasoline was in order.
The contract files indicate,     and au agency official       confimed,   that
Asiatic did not reply to this letter.           The official  indicated that the
only Atrther action in the matter had consisted of an unofficial            eon-
verreation with one of Asiatfc's     officials.      The contract files did not
contain a record of this conversation or of auy other follow-up action.
We were informed, however, that the matter had mot been dropped.

Overpayment for transportation
of fuel fkom Singapore to Vietnam
     From October 1966 through December 1969, the contracts provided
that the contractor would be paid a transportation  charge for each day
a ship was (1) at sea while carrying cargo from Singapore to VPetnem
or Thailand, (2) at ports of destination  in Vietnam or Thailand, and
(3) at sea while returning to Singapore.

      The contracts provided that, if a vessel could not complete its
voyage (from Singapore to Vietnam or !Phailand and back to Singapore)
because of a "force majeure" (an event that could not reasonably be
foreseen or controlled),    the Government would pay transportation
charges for that voyage up to the time of its interruption.        Tt would
also reimburse the contractor on a limited basis for any costs result-
ing from the vessel's inability    to complete the voyage, including the
cost of returning the vessel to Singapore. The Government's total
obligatt;ion to the contractor was limited to the amount of transporta-
tion charges that would have been payable if the voyage had been com-
      We noted two instances in which a contractor-controlled     vessel,
after delivering part of its cargo to a destination in Netnam, encount-
ered circumstances which prevented it from delivering      the rematnder of
its cargo. The %mastra' was involved in an accident in a Vietnamese
harbor on April 12, 1967, and the "HelisomaU was damaged by a mine in
the same Vietnamese harbor on Deceniber 22, 1.968. Because of the danage
sustained by the vessels, they could not complete their voyages but had
to return to Singapore.
      The contractor billed the Government and was paid a net amount of
$216,000  covering all transportation   charges for the time spent by the
two vessels, including salvage operations and returning the vessels to
Singapore, and by other contractor-controlled    vessels in rendering sal-
vage assistance.     The munts paid exceeded the amounts of transportation
charges that would have been payable if the two vessels had been able to
complete their voyages. We estimate that, if the voyages had been com-
pleted, transportation    charges of about $113,OOCwould have been payable,
Thus we estimate the contractor was overpaid $103,000,
     DISC officials  indicated that overpayments may have been made and
that they would review the situation and take appropriate action.
Credit not obtained for returned    cargo
       !Checontract in effect at the time the "Helisoma" sustained its
mine damage in December 1968 provided that the contractor would be paid
for petroleum products on the basis of quantities loaded at Singapore
and delivered to destinations   in Vietnam or Thailand.  Under these con-
ditions the Government should receive credit for any cargo loaded at
Singapore that was not delivered to its destination.
      Some of the cargo from the %elisoma" was not delivered to its
destination   but was returned to Singapore. Although a credit is du8
the Government for this cargo, our review of credit invoices revealed
no evidence that a credit had been processed. We estimate that about
$20,000 should have been credited to the Government for the cargo that
was returned.
      lX%C officials          stated that they would review this watter                 and take
appropriate         action.
Contractor permitted           to retain                over-
payment  for intransit          losses
      Three of the contracts that we reviewed contained a provision to
reimburse the contractor for replacing fuel lost intransit          through
normal leakage or evaporation on voyages from Singapore to Vietnam or
Thailand.      The contracts provided that the amounts payable to the
contractor for intransit       losses were to be computed as a percentage
of the product price under the first contract and as a percentage of
the product price plus cargo insurance and transportation          charges und8r
the other two contracts.         Under the terms of the contracts,    most of the
intransit-loss     charges were billed by the contractor and paid by the
&Werment at tentative        rates that were subject to adju&mEtnt after fuel
shipments had been completed and insurance costs, transportation            charges,
and product prices had been finally        determined.
      We found that the payments made to the contractor     for intransit
losses had not been adjusted retroactively     on th8 basis of ffnally    deter-l
mined insurance costs, transportation    charges, and product prices.      We
8Stimated that, as a result,   the contractor was overpaid about $25,ooO
for intransit  losses under the three contracts,
     DISC officials   stated that the need to make retroactive  adjustment
to the intrausit-loss    charges had b88n overlooked in the admInistration
of the contracts involved.
     We r8COnaPendthat action                          be taken to recover the mounts   overpaid
the contractor for:
          --gasoline   charged at the higher Caribbean price but actually
             shipped f!rom a less expensive source,
          --transportation     charges from Singapore to Vietnam in excess
              of contract limitations,
          --cargo    loaded at Singapore that was not delivered,                  and
          --any intransit~loss      payment determined to be excessive.

     We would appreciate receiving your come&s concerning any action
taken or planned on the matters discussed in this report as well as
your views as to whether au internal audit of other petroleum contracts
in Southeast Asia should be made,
                                                Sincerely   yours,


                    Asiatic        Petroleum Corporation   Contracts
                                      Reviewed by GAO

     Contract       Effective        Date             Dollar   Value          Period of performance

DSA&O-67-D-0591     Oct. 1, 1966                      &2,721,225       Oct. 1, 1966 - June 30, 1967
DSA-600-67.~-2263   July      1,   1967                41~35,870       July 1, 1967 - Dec. 31, 1967
ma-600-68-D-0656    fan.      1,1968                   61,244,487      Jan.1,1968    -June   30, 1968
~~~-600-68-D-164l   July1,1968                         51,314,431      July 1, 1968 - Dec. 31, 1968
mw%o-6g-D-o576      Jan.1,         1969                71,213,823      Jan. 1, 1969 - June 30, 1969
DSA-600-69-D-1747   July 1, 1%9                        $9,=,338        July 1, 1969 - Dec. 31, 1969
ASA-600-70-D-0990   Dec. 23, 1969                      36,425,4lO      Dec. 23, 1969 - June 30, 1970