A long-standing dispute over the problems surrounding Kenya's sole refinery in Mombasa is escalating, triggering fears the country could lose clout as an investment magnet for neighboring countries.
A financial crisis at the aging plant is fueling calls by the oil industry to modernize or shutter East Africa's only refinery, a move that could lead to acute fuel shortages across the region.
Although progress toward commercial development of oil resources in Kenya has been modest, the country plays a key role in the region as an oil transit hub, particularly for oil products coming into the region. Oil marketers have threatened to boycott buying products from the refinery from July 1 for failing to operate at its nameplate capacity and producing lower quality products.
Marketers, including Total, KenKobil, Libya Oil, Kenya's National Oil Corporation (NOCK), who have long complained about the inefficiencies at the 50-year old refinery, owned by the government as Essar Oil, last month said products processed at the refinery were more expensive than imports and cost the economy at least $18.8 million a month.
The Kenyan energy regulator this week said the future of the refinery -- whether to upgrade or turn it into a storage facility -- would be decided at the end of the month.
Linus Gitonga, director of the ERC, said the refinery could be converted into a storage facility if it proved uneconomical to upgrade the plant. John Mruttu, general manager at Kenya Refineries Petroleum Refineries, this week said an upgrade of the plant is likely to cost $1 billion.
At full capacity, the refinery's output only meets 50% of the region's petroleum product demand. However, for much of 2012, the plant's output averaged only 32,000 b/d increasing the region's dependence on imports.
EcoBank Research estimates Kenya, Tanzania, Rwanda, Burundi and Uganda consume 149,000 b/d of oil products, which is expected to rise to 235,000 b/d by 2020.
The oil industry's biggest obstacle remains inadequate and aged infrastructure, but the country is is embarking on a multi-million-dollar investment to increase its midstream and downstream capacity.
In addition to replacing the Mombasa to Nairobi pipeline, it is also planning on increasing throughput capacity at the port of Mombasa to meet growing demand for goods in Kenya and neighboring countries. It is also working with Uganda to extend the 218-mile Nairobi-Eldoret pipeline to Kampala, the capital of Uganda, that may be extended to Rwanda in the future.
Kenya is spearheading the $25.5 billion Lamu Port and South Sudan and Ethiopia Transport (LAPSSET) project, one of east Africa's largest infrastructure projects.
The project includes a refinery at Lamu, oil pipelines, railway lines and a new deepwater port at Lamu.
While the International Monitory Fund has projected Kenyan oil production could start in six to seven years, industry experts say this is optimistic because the commercial viability of discoveries is still uncertain. If oil reserves prove to be significant, this could be transformative for Kenya's economy. Petroleum is the single largest import by Kenya, accounting for 21% of its total imports.
Meanwhile, a parliamentary committee on energy rejected demands this week that the Mombasa-based refinery be shut down.
"Why should we go in that direction? Kenya is a leading economic powerhouse in this part of the world, and despite the aging refinery, we need to carry out the upgrade," committee chairman James Rege told local media.
