KENYAN manufacturers are betting on a $16 billion (about Sh2.08 trillion) oil refinery planned for Lamu to help cut energy and logistics costs.
This is in addition to strengthening industrial supply chains and helping restore the competitiveness of the country’s manufacturing sector.
The groundbreaking of the East Africa Oil Refinery by Nigerian billionaire Aliko Dangote on September 30 marked one of the biggest private-sector investments ever announced in Kenya and placed the country at the centre of an emerging regional petroleum and petrochemical market.
But for manufacturers, the real test will be whether the massive investment translates into cheaper and more reliable energy, locally available industrial inputs and new opportunities for Kenyan firms.
The proposed refinery will have capacity to process up to 700,000 barrels of crude oil per day, producing petroleum products and petrochemicals for Kenya and regional markets.
Kenya currently relies heavily on imported refined petroleum products, exposing manufacturers and transporters to international prices, shipping costs, insurance premiums, exchange-rate movements and supply disruptions.
Manufacturers spend billions of shillings annually on Heavy Fuel Oil (HFO), driven by massive consumption for industrial thermal processes, with about 300 million litres of HFO annually.
While 30–35 per cent of this volume goes toward thermal electricity generation, the remaining 65 per cent to 70 per cent (roughly 195 to 210 million litres) is directly consumed by Kenya's manufacturing sector.
It is primarily used for steam generation, process heating, and large-scale industrial thermal applications in sectors like cement, steel, brewing, and food processing.
A large regional refinery could hence shorten that supply chain and ease costs.
For factories, this could lower one of the costs that feed directly into the price of manufactured goods—energy and transportation.
Kenya Association of Manufacturers chief executive Tobias Alando has identified logistics and the cost of doing business as major constraints to industrial competitiveness, arguing that improving the movement of goods is critical to lowering production costs.
The Dangote investment could therefore provide manufacturers with an opportunity to reduce exposure to some of the external supply-chain costs that have weighed on their operations.
However, cheaper fuel will not automatically mean cheaper Kenyan products.
Manufacturers continue to face high electricity costs, expensive credit, taxes and levies, regulatory bottlenecks, inadequate infrastructure and competition from imported goods.
“The refinery is an opportunity, but the wider industrial ecosystem must be put in place for manufacturers to benefit,” Alando said.
A major potential gain is the refinery’s petrochemical output.
The facility is expected to produce products such as polypropylene and base oils, creating an opportunity for Kenya to develop downstream industries producing plastics, packaging materials, synthetic products, lubricants and other industrial goods.
Currently, many manufacturers import petrochemical feedstocks, exposing them to foreign exchange fluctuations, international freight costs and delays.
Local or regional availability of these inputs could shorten supply chains and make it easier for manufacturers to expand production.
The refinery could also create new markets for Kenyan engineering, fabrication, transport, warehousing, maintenance and logistics companies.
But manufacturers want local firms integrated into these opportunities rather than allowing the bulk of contracts to go to foreign companies.
The government and the investor will therefore face pressure to establish a strong local-content framework covering procurement, skills development, technology transfer and supplier financing.
The project also comes at a critical time for Kenya's manufacturing sector.
Manufacturing's contribution to the economy has declined from more than 11 per cent of GDP a decade ago to about seven per cent, raising concerns about the country's ability to create jobs and move towards a more industrialised economy.
The refinery could help reverse that trend if it becomes an anchor for a wider industrial cluster in Lamu.
According to KAM, the biggest opportunity lies in building industries around the refinery rather than simply exporting refined petroleum products.
These could include petrochemicals, plastics, fertiliser, packaging, chemicals, lubricants and other energy-intensive industries.
“Such downstream investment would allow Kenya to retain more value locally and create jobs beyond the refinery itself,”Alando noted.
The location in Lamu also presents a major infrastructure challenge.
For the investment to deliver its full economic potential, the government will need to improve road, port, pipeline, power, water, storage and logistics infrastructure around the project.
Lamu Port and the wider LAPSSET corridor could become critical components of the emerging industrial hub.
Manufacturers also want predictable pricing.
“If refinery products are sold at prices that do not reflect the expected logistics and supply-chain efficiencies, the manufacturing sector may see little improvement in its cost structure,” Alando noted.
Government will therefore need to ensure transparent pricing, effective competition and a regulatory framework that protects industrial consumers while allowing the project to earn adequate returns.
The warning is that without supporting reforms, Kenya could end up hosting a giant refinery while manufacturers continue to struggle with high operating costs.
Alando said Kenya must use the investment to build stronger linkages between large-scale projects and local enterprises.
“The government should therefore require clear local procurement targets, support Kenyan suppliers to meet international standards and provide access to finance so small and medium-sized manufacturers can participate in the emerging value chains,” he said.
