Kenya, Dangote eye LNG power deal at Lamu refinery, target Tanzania gas

Kenya is in talks with Dangote Industries to double the planned capacity of a liquefied natural gas (LNG) power plant at its proposed Lamu refinery, potentially increasing it to 1,000 megawatts (MW) and opening a major new market for Tanzanian gas.

The refinery was initially expected to have a 500MW captive power plant to meet its operational needs. However, discussions are now centred on doubling that capacity, with the government willing to purchase the surplus electricity as Kenya battles power shortages.

The proposal, driven by President William Ruto’s economic advisory team, led by David Ndii, could see Dangote secure a power purchase agreement (PPA) with state utility Kenya Power, which has been pushing to diversify into gas-powered generation.

Surplus power to feed Lamu SEZ

Most of the excess electricity would be used to power the Lamu Special Economic Zone (SEZ), where the refinery is planned, and the adjoining petrochemical complex.

“[Dangote’s] Lagos refinery has a 500MW power plant, and this one [Lamu], we are proposing to do 1,000MW so that we also power the SEZ. Remember, we are doing a refinery and a petrochemical complex next to it,” Ndii told The Africa Report.

“We need power. If it is overcapacity, we will buy the rest because it is very cheap. If you do a 1,000MW gas plant, you offtake that at 4-5 US cents per kilowatt [-hour]. So the only power we need to provide is during construction,” Ndii said. A spokesperson for Dangote did not respond to questions by email, text or phone about the talks.

While the proposal remains at an early stage, with its final structure yet to be agreed, Kenya’s Energy Principal Secretary Alex Wachira says the government “shall give necessary approvals to put up a captive power plant to run the refinery”.

“About our ability to pick the extra power generated by the power plant, it’s important to note that we are energy deficient as a country. We are net importers, so this will help in bridging the deficit,” Wachira said.

Tanzania gas could gain new buyer

The project could elevate Tanzania into a critical supplier of gas to Kenya’s coast, drawing on the country’s vast offshore reserves — estimated at 47 trillion cubic feet, among the largest in the region.

It would also provide Nigerian billionaire Aliko Dangote with an additional revenue stream while easing tensions between Kenya and Tanzania after he abruptly shifted the refinery’s proposed location from the initial site in Tanga to Lamu.

Dangote plans to replicate his 700,000-barrels-per-day Nigerian refinery in Lamu at an estimated cost of $16bn—$17bn, targeting fuel export markets across Eastern, Central and North Africa.

Kenya and other East African countries have been offered a combined 30% stake in the refinery company, with Nairobi considering a $500m investment for a 10% share.

Ruto’s administration has offered the project — expected to rank among the largest private investments in Kenya and East Africa — a package of incentives, including SEZ tax and customs concessions and an offtake agreement for refined petroleum products.

In Kenya, the electricity talks come as power demand rises while domestic generation has stagnated, forcing the country to rely increasingly on imports from Ethiopia and Uganda.

An offtake commitment for Dangote’s surplus generation signals Nairobi’s willingness to lift its long-standing freeze on new PPAs, imposed in 2021 to review generation costs and existing contracts.

Kenya’s shrinking power reserves

Amid the PPA freeze, Kenya’s reserve margin — the cushion between available generation and peak demand — has sharply contracted to less than 3.3%, well below the recommended 20%-30% range.

The thin reserve has often forced the state utility Kenya Power to load-shed in parts of the country to protect the grid and prevent wider blackouts.

The government is therefore seeking a broader generation mix, balancing intermittent wind and solar with more stable generation from geothermal, hydro and, now, LNG.

Kenya is already preparing a 1,200MW LNG power project at Dongo Kundu in Mombasa under a public-private partnership (PPP), with construction planned in phases through 2032.

The first 300MW phase is expected to be supplied by a floating LNG power barge in the Indian Ocean as an interim measure until the permanent onshore facility is completed.

If both projects materialise, Dangote’s 1,000MW plant and Dongo Kundu’s 1,200MW facility would create a sizeable long-term market for Tanzanian natural gas along Kenya’s coast.

“One of the LNG sources is Tanzania. If it is agreed on, it can take just nine months to have additional LNG through a floating barge. As we carry on, then the conversation will be how to do a gas pipeline,” says Kenya Power CEO Joseph Siror.

“We need baseload generation. Where we can get it [in the] shortest timeframe, we will definitely do that,” he told The Africa Report in a recent interview.

Tanzania has about 47 trillion cubic feet of offshore gas resources, and the long-delayed Tanzania LNG project in Lindi is expected to underpin a major export industry.

Kenya and Tanzania signed an agreement in 2021 to develop a gas pipeline from Mtwara to Mombasa, but progress has stalled since then. Fresh demand from the Dangote refinery and the Dongo Kundu projects could strengthen the pipeline’s commercial case.

However, LNG infrastructure and imported gas can be costly and expose Kenya to global price swings, so the government needs to secure competitive gas prices and tightly structured supply contracts to prevent LNG-fired power from becoming another burden on consumers. (The Africa Report)