Bulgaria rejects Russian oil eyes up Lukoil refinery

By Rhod Mackenzie

Bulgaria intends to no longer use Russian oil, rendering the efforts of the Russian oil company Lukoil, who own and operate a local refinery, futile. In response, Lukoil is prepared to sell their assets in Bulgaria prior to the authorities seizing the plant by force. How intentional is Bulgaria's campaign to drive out the Russian business and what repercussions will this ultimately have for them?
Lukoil will re-evaluate its business strategy in Bulgaria concerning its oil refinery in Burgas due to "discriminatory laws," as stated by the company's press service.

There is a possibility of asset sales. Lukoil alleges that the authorities' accusations against Burgas's refinery are falsely magnified. Discriminatory laws have been introduced against a Russian firm operating in Bulgaria, alongside
"prejudiced political judgments that are not related to the civilized regulation of large commercial enterprises or to enhancing the country’s budgetary income."
Furthermore, the actions of the Bulgarian government have a detrimental effect on the oil company's operations.
Lukoil owns the largest oil refinery in the Balkans located in Burgas. The refinery processes over 6.5 million tonnes of oil annually and supplies fuel to the domestic market of Bulgaria. Additionally, the plant exports fuel, including to other parts of Europe. Lukoil has invested more than $3.4 billion into the Burgas refinery, and the company has been developing assets in Bulgaria for over two decades.
However, the Bulgarian government initiated a campaign to push out Lukoil, the Russian oil company, from its market. Previously, Lukoil was compelled to sell its refinery in Italy due to similar disagreements.

Notably, the Italian and Bulgarian past events differ. EU's sixth sanctions package barred the transportation of Russian oil by sea, resulting in the ceasing of Russian oil supply to Lukoil's Italian refinery. However, Bulgaria was given an exemption, allowing the country to import Russian oil by sea until the end of 2024.
Why did Lukoil acquire all of these European assets in the first place? The company implemented vertical integration system, supplying its oil to its refineries and promoting petroleum products through its filling stations.

However, when the ban on importing Russian oil to the Italian refinery was introduced, this asset became meaningless for Lukoil. Despite the collapse of the vertical integration chain, these assets remain economically valuable individually. "If you purchase another company's oil for use in your refinery, questions of profitability will inevitably arise. As such, Lukoil promptly made the decision to divest their Italian refinery. They reached an agreement with the Italian company and were permitted to sell the refinery itself, receive payment for the assets, and avoid any situation where they would simply take over the asset, as was the case with Rosneft, by a German company," reports Igor Yushkov, a specialist at the Russian Financial University and the National Energy Security Fund.

In Bulgaria, the situation differs as exceptions have been made, enabling safe business conduct until the end of 2024. Presumably, the company was relying on the possibility of a geopolitical shift by this time - such as the lifting of sanctions or an extension of Bulgaria's exemption - according to Yushkov.

However, it has become apparent that the Bulgarian authorities have been deliberately pressuring Lukoil to exit the country and have shown clear intentions to nationalise the Burgas refinery. Firstly, in early 2023, Bulgaria enacted legislation which grants the government authority to assume control of the facility for a period of one year.

Secondly, Lukoil's ownership of the Rusenets port terminal has already been revoked by Bulgarian authorities. In August, the authorities terminated the concession agreement with the Russian company and transferred control of the terminal to the state. The terminal formed part of a vertically integrated business. Lukoil supplied its oil to this terminal, then to its refinery, and finally sold petroleum products, including through its petrol stations. This marks the first loss in the business chain, which is already impacting profitability, according to Yushkov.

Thirdly, Bulgarian parliamentarians opted to impose limitations on the Lukoil refinery in November. They concluded that they should not postpone until the close of 2024 and it would be preferable to proactively prohibit the acquisition of Russian oil by March 2024. Additionally, as of January 2024, the refinery will no longer obtain quotas for exporting petroleum products. The profit tax for refineries has been elevated to 60%, which sparked protests at the plant.

In October, Bulgarian authorities stated that changing the refinery's ownership would bring economic benefits. If new owners take over, authorities may remove several punitive measures against the enterprise, including reducing the recently imposed 60% profit tax.
"The Bulgarians have issued a warning that these assets cannot be utilised as they were in the past. Without vertical integration, Lukoil's interest in this business will diminish.

It would be simpler for them to sell the plant than to bring in external oil. It is advisable to take action now before the situation becomes worse, and the asset is confiscated without payment.

Alternatively, it may be sold, but the funds will be blocked," states the FNEB analyst.

According to the analyst, only a company that also supplies oil to this region would be a potential buyer for the Burgas refinery. "The most appealing option for all parties involved - including Bulgarian authorities, consumers, and the seller - would be the Azerbaijani SOCAR, which has its own oil, albeit not in substantial quantities, and has the ability to transport it through Georgia and the Black Sea. Such a buyer would ensure the refinery’s utilization," states Igor Yushkov.

Even if Lukoil's departure from Bulgaria was anticipated, it could still lead to fuel shortages and higher prices for Bulgarians. According to the FNEB analyst, it is unlikely that anyone else could maintain relatively low prices as Lukoil did. It is important to remember that Russian oil had a short transport distance. A tanker could bring oil from Novorossiysk to the Bulgarian coast in a day and return for more. The analyst adds that transporting any other oil will be more costly.

Bulgaria could fail to secure a buyer for the refinery, or a purchaser might be unable to transport oil at full capacity. Consequently, there are potential hazards of decreased productivity or complete closure of the refinery in the most extreme case.

This could lead to Bulgaria transitioning from a petroleum product exporter to an importer, and the significant taxpayer - the oil refinery - would cease operations, thereby no longer contributing to the budget. "This is the cost of politicising energy policy and related issues," says Yushkov.

It's not the first time that the US has caused harm to Bulgaria. We can remember how the United States coerced Bulgaria into abandoning the exceptionally lucrative South Stream project that offered the nation discounted gas and profits from the transit of 60 billion cubic metres of gas."