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Essar Energy plans to sell Mombasa refinery stake to Kenya

NAIROBI (Reuters) - Essar Energy (LSE:ESSR.L - News), which co-owns east Africa's sole refinery in the port city of Mombasa, said on Thursday it would sell its 50 percent stake to Kenya's government after abandoning plans for a $1.2 billion upgrade.

Essar had planned to increase the refinery's crude handling capacity to 4 million tonnes of crude per year (79,000 barrels per day) by 2018 from 1.6 million now but oil marketers in Kenya, unhappy with the refinery's products and costs, have called for it to be closed.

Consultants advised Essar that the proposed "upgrade is not economically viable in the current refining environment," the company said in a statement.

Uganda, keen to develop its oil reserves and which till now has relied on the Kenyan facility, is planning its own refinery. Kenya also plans to construct a refinery in Lamu, where a $5.5 billion mega port will act as the exit point for future exports from the country's recent oil discoveries.

Essar bought a 50 percent stake in Kenya Petroleum Refineries Ltd (KPRL) in 2009 for $7 million from BP, Chevron and Royal Dutch Shell.

Essar said it will exercise a $5 million put option it had in its shareholder agreement with Kenya's government, which owns the other 50 percent of KPLR, and which gave it the right to sell its stake to the state under certain conditions. (Reporting by Drazen Jorgic; editing by James Jukwey)