Why Dangote’s Lamu refinery cannot shield Kenya from global oil shocks

Aliko Dangote's planned Ksh2.1 trillion ($16 billion) oil refinery in Lamu, Kenya, is intended to address the country's reliance on imported petroleum products. However, the refinery's completion is targeted for 2030, and it will only marginally reduce Kenya's dependence on global oil markets in the meantime. The refinery's ability to shield consumers from oil shocks hinges on several factors, including the source of crude, financing costs, and the readiness of supporting infrastructure.

Currently, Kenya's fuel market is highly susceptible to international crude prices, shipping costs, foreign exchange fluctuations, and disruptions to global supply routes. Even after the refinery starts operating, it will not eliminate the need for crude oil, as Kenya currently has no commercial crude production. Uganda and South Sudan are also developing their oil industries, but Dangote has stated that crude for Lamu will come from East African producing countries and the Middle East, among other sources.

While the refinery can diversify Kenya's refining side of the fuel supply chain, it will not make the country independent of international oil markets in terms of crude prices. The final fuel price will still depend on various factors, such as crude costs, refinery operating expenses, financing, taxes, distribution, storage, and margins.

To justify its scale and generate sufficient cash flow to service its debt-heavy financing structure, the refinery must attract a regional market. This means Kenya's demand is not the only factor driving the project's economics; it also relies on the ability to move products efficiently into neighboring countries. Additionally, the refinery includes a 1,000-megawatt power plant, with half of the electricity potentially sold to the Kenyan government.