Mumbai: Essar Energy Plc on Thursday said it intends to sell its 50% stake in its joint venture in Kenya that operates an oil refinery in Mombasa, the country’s second-largest city.

The sale is likely to fetch Essar Energy $5 million, about $2 million less than what it paid for the 50% stake.

Essar Energy, through its subsidiary Essar Energy Overseas Ltd, has exercised a put option under a shareholders’ agreement to sell its stake in Kenya Petroleum Refineries Ltd (KPRL) to the Kenyan government, which owns the remaining 50% interest in the refinery. A put option offers a stakeholder the right to sell by a certain date.

“This decision by Essar Energy follows an extensive series of studies by international consultants into the technical, economic and funding elements of an upgrade of the Mombasa refinery. Following these studies, Essar Energy believes that the upgrade is not economically viable in the current refining environment," Essar Energy said in a statement.

Essar Energy acquired its 50% stake in KPRL in July 2009 for $7 million from BP Plc, Chevron Corp. and Royal Dutch Shell Plc. Under the terms of the shareholders’ agreement established with the government of Kenya, Essar Energy has the right, under certain conditions, to exercise a put option under which the Kenyan government would buy its 50% share of KPRL for $5 million.

This acquisition was termed as Essar’s entry into the overseas refining market and is “a step towards realizing its vision of a global refining capacity of 1 million barrels per day".

Prior to the acquisition, Kenya’s government had earlier blocked the deal on grounds that it would imperil the energy security of the country. The government had wanted the 50% stake to be shared by at least two entities to ensure that it would remain the majority shareholder and retain control over the firm.

A senior Essar Group executive, requesting anonymity, said the company had launched techno-economic feasibility and found out that it is not economically viable to undertake the project.

“Therefore, Essar Energy has decided to exercise the put option and exit KPRL. This will not have any material impact on Essar Energy’s plans," he said.

Last month, Essar Energy had appointed former deputy managing director of Jindal Steel and Power LtdSushil Maroo as chief executive officer and a director of the company following the decision by Naresh Nayyar, the current chief executive officer, to step down. Nayyar will, however, be appointed as a member of the Essar Corporate Centre, an oversight advisory committee.

The decision to exit KPRL comes at a time when the Essar group, the parent company of Essar Energy, is also grappling with debt. Its gross debt increased from 85,224 crore in fiscal 2012 to 98,412.8 crore in 2013, according to a report by Credit Suisse Securities Research and Analytics in August.

The Essar group is trying to reduce this huge debt burden with companies converting their rupee debt into dollar debt and refinancing old high cost loans with relatively cheaper new loans.