DEFENSE DIVISION b 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- able. OPPORTUMITIESFOR MpRoTTDBGmfcIB REGOTIATIOHS FOROCEWTRAEWORTATIOIB 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 product. 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. Reco=ndation 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. JBED TO STREIUGTfIEN CONTRACTADMINISTRATION 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 -2. 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 sources. 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. -3- 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- pleted. 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. Recomnendations 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. ---w-------I- -5- 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, -6. Appendix 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 $383,821,584
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)