The Cook Islands power company, Te Aponga Uira, says about half a barrel of waste oil leaked in to the Avatiu stream last week when rainwater flooded a catchment tank.
Company spokesperson, Trevor Pitt, says the quick response of workers at the power station meant that much of the leak was contained and removed from the creek waters soon after it seeped out of the tank.
Avatiu Valley residents have lodged complaints with the National Environmental Service over the incident and the NES is now investigating the claims.
Jacqui Evans of environmental group Te Ipukarea Society says the people of Avatiu were right to raise concerns about the leak.
She the company has been prosecuted in the past for discharging fuel in to the Avatiu stream.