The Neftohim refinery, owned by the Russian company Lukoil, can operate without processing Russian oil, as Bulgaria imports crude oil and other raw materials from numerous alternative sources, including from the Black Sea region, the Middle East and West Africa.
This is stated in an analysis of the Center for the Study of Democracy on the occasion of the possible early termination of the derogation for the import of Russian oil and petroleum products for processing at “Lukoil Neftohim Burgas”.
The CID examines the possible scenarios for early termination of the derogation. Even in the most unfavorable scenario, in which the Neftohim refinery stops operating completely, the risk of fuel shortages on the Bulgarian market can be avoided by skillful management of the current reserves and the import infrastructure, which is currently under Russian monopoly control , the experts point out.
According to them, the shutdown of the refinery can and should be prevented. In this regard, the government should demand from “Lukoil Neftohim Burgas” a plan with specific terms and investment commitments for the implementation of the EU oil embargo at least 12 months before the current deadline of the derogation. The plan must be confirmed with an external audit by the State Financial Inspection Agency. Non-compliance with these requirements by Lukoil Neftohim Burgas should lead to stricter measures, such as placing the refinery and all other assets owned by the company under state control.
The analysis shows that the derogation did not lead to a significant reduction in prices, nor to higher government revenues from corporate taxes. Instead, Lukoil has generated excess profits of at least $2.4 billion in 2022 and 2023, thanks to the deep discount at which Russian crude is trading. At the same time, the supply of fuel to the Ukrainian army, which was used as the main argument for obtaining the derogation, has decreased compared to the beginning of the war, experts point out. And they add – the profits are redirected to the Kremlin’s military portfolio. About 4% of the total revenues from Russian oil that enter the Kremlin’s budget are generated by Lukoil’s activity in Bulgaria.
Basic extracts:
There are no economic and technical grounds for maintaining the derogation from European sanctions for the import of Russian crude oil in Bulgaria.
The removal of the derogation will not have a significant impact on the final prices of fuels in Bulgaria.
The derogation is the biggest obstacle to completing the strategic disengagement from malign Russian economic and political influence in the country.
Lukoil has generated at least $2.4 billion in excess profit from the waiver in 2022 and 2023.
Lukoil’s monopoly on the Bulgarian oil market is one of the strongest levers Russia uses to strengthen its networks of state capture.
If the Russian company does not comply with the EU sanctions on the import of Russian oil, Bulgaria should place the refinery under special state control.
Over the past five years, the main supplier of crude oil for “Lukoil Neftohim Burgas” JSC has been Russia. For the period from 2014 to 2022. Russian crude oil imports averaged 73% of the total, followed by Egypt at 13%. After the start of the war in Ukraine, Bulgaria is one of the few European countries that increased the import of Russian oil, which reached 100% of supplies in the first quarter of 2023, CID said. The annual consumption of petroleum products in Bulgaria is relatively stable and amounts to about 4.5 million tons of oil equivalent per year (tne/year). The country produces only about 25,000 t/y of crude oil and condensate, which equates to less than 1% of consumption.
At the same time, the price at which fuels are sold on the Bulgarian market is much higher than the cost of their production (raw material and costs for processing into final products), it is clear from the analysis.
Impact on the fuel market
The removal of the derogation will not have a significant impact on the final fuel prices and they will remain the lowest (after taxes) in the entire European Union. This is driven both by low taxes and excise duties, which are on average a third lower than those in the EU, and by an expected slight increase in producer fuel prices (before taxes), the Center for the Study of Democracy says.
The increase in price due to the change in the type of oil processed in the refinery (in case of a complete stoppage of Russian oil imports) should not be more than 10-12 cents per liter. Costs for more complex oil or fuel supply logistics, including the need to import more tankers, could add another 1.5% to the pre-tax price.
On the other hand, removing the derogation would lead to a serious shift in the wholesale market in Bulgaria, allowing other companies that import non-Russian fuels to compete for Lukoil’s market share.
If the Russian company continues to operate its assets in Bulgaria, it will have a predominantly strong position in the market because of its control over the excise warehouses and those storing the quantities for the state reserve, as well as because of the ability to process very large quantities of oil at the most the low cost in the region.
Greater competition from alternative fuel imports would undermine Lukoil’s ability to impose its pricing policy, and the result would be more aggressive competition in the retail market.
What next?
Several successive governments of Bulgaria spread false claims that without the derogation, the Neftohim refinery would not be able to operate, leading to a shortage of fuels and other refined products, CID experts claim.
The financial and political interests served by this derogation do not protect Bulgarian consumers, but rather the Kremlin and related oligarchic interests. For every barrel refined at Neftohim, its Russian owners double their net profit from Russian-made oil by selling the refined end products on the Bulgarian market instead of just exporting the crude oil at a discount due to sanctions.
This profit represents a significant financial transfer to the Russian government, which allows the continuation of military aggression in Ukraine, the analysis indicates.
Russia’s monopoly control over Bulgaria’s oil and refined products market for decades has provided significant rents and exacerbated problems of corruption and state capture.
Ending the oil embargo waiver is an important step toward depriving the Kremlin of additional profits to fund its war in Ukraine.
If the Russian company refuses to fulfill the condition of full diversification of crude oil supplies, the government should place the refinery and all other assets owned by Lukoil under state control through the “golden” share that the country has in the company and allow it to influences strategic decisions such as the structure of oil supplies.
An additional important step is the termination of the concession contract for the operation of the oil import terminal in Rosenets. This would open up access to port services for more companies, help Bulgaria ensure that the terminal is not used to evade sanctions by smuggling oil, and would ensure the correct accounting of VAT and excise revenues, which are essential for fiscal security.
Bulgaria has long been one of the most vulnerable countries in Europe in terms of Russian economic and political influence. Russian control over the Bulgarian oil and fuel market has helped establish powerful networks of influence in Bulgarian politics and economics, which interfere in strategic decisions such as the ban on shale gas exploration, the acceleration of the Belene NPP project, and the financing of pro-Russian political parties and media.
Against this political background, Bulgaria has no economic or technical reasons to continue the derogation from the EU oil embargo, the Center for the Study of Democracy also points out.
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2023-08-25 19:28:00
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