Lukoil Neftokhim Burgas -derogation for Russian oil
The future of the refinery in Bulgaria “will be a story of decline”, said Viktor Katona, head of market information at Kpler
The largest Russian private oil company Lukoil casts a huge economic and political shadow over Bulgaria. But the privileged energy company is in danger because the derogation from EU oil sanctions enjoyed by its Bulgarian branch expires at the end of next year. This will put an end to the company’s unique and highly profitable business and its extremely favorable position to supply its huge Neftohim refinery in the Black Sea port of Burgas with its own cheap crude oil.
This is how Politico’s analysis of the Rosenets refinery begins, reports Euronews Bulgaria.
The future of the refinery “will be a story of decline,” said Victor Katona, head of market information at Kpler. If the operation of the refinery is threatened, the government is ready to take it over, “if necessary, Bulgaria’s Defense Minister Todor Tagarev told the publication in June. In his words, “this is a matter that can be resolved.”
For now, “Lukoil” rules Bulgaria
According to Kpler data, it imports 3 million barrels of Russian oil per month, which makes Bulgaria the fourth largest buyer of Moscow crude oil in the world after India, China and Turkey. Neftohim, whose imposing chimneys can be seen from 10 km away, provides 80% of the diesel and gasoline for Bulgaria’s needs, which is one tenth of the country’s GDP.
The refinery is “very important because it is the largest provider of work and gives the best wages” in the region, said Burgas Mayor Dimitar Nikolov. Along with the nearby Rosenets oil import terminal, the facilities employ 5,000 people. “For me as mayor, it is important that the refinery operates because it is part of the economic security of the city,” he said, adding that closing it would be “unthinkable.”
This economic and energy footprint means political influence. “There is a Lukoil coalition in Bulgaria, which is formed immediately after the start of each parliament,” said Delyan Dobrev, chairman of the Energy Committee in the National Assembly, who is leading efforts to limit Lukoil’s influence. He has brought 18 proposals over the past year to limit the company’s influence, but most of them have come to nothing.
“Lukoil” manages to turn its economic footprint into a large political lever of influence” by financing media and parties, says Martin Vladimirov, an expert at the Center for the Study of Democracy. “Its influence on the Bulgarian political and economic elite is enormous.”
This influence is “so great” in part because “the Bulgarian state is not capable of dealing with the crisis in the event of a sudden stoppage of crude oil supplies from Russia,” says Iliyan Vassilev, a former Bulgarian ambassador to Russia who now works as an analyst . “In the past, Lukoil has relied on the support of the local pro-Russian media, as well as politicians, whom it influences through local intermediaries such as wholesale fuel buyers,” Vassilev said.
In response to the claims, the Moscow-based firm pointed to a recently published story by Politico in which it “denies any allegations of political involvement.”
Lobbying efforts
Bulgaria’s dependence on Russian crude oil was among the reasons why the country lobbied for an exemption from EU sanctions against Russian oil imports. An effort that was supported by the entire political spectrum, including reformist Prime Minister Kiril Petkov.
Last year, Sofia received the only derogation in the EU to import crude oil by sea, while several countries were allowed to continue buying oil by pipeline for a limited period of time. In the negotiations with the EU, the leader was Finance Minister Asen Vassilev, who threatened to veto the package of oil sanctions if Sofia did not receive an exception. The Ministry of Finance denies that Vassilev lobbied on behalf of Lukoil.
The ministry said the key rationale used by Vassilev in securing a derogation for Bulgaria was that the refinery sold fuel to Ukraine. Petkov previously told Die Welt that fuel produced at Neftohim was sent to Kiev, which allegedly supplied more than a third of Ukraine’s fuel at the start of the war last year.
Lukoil told Politico that it is an “international private company that does not have a state stake” and denies having “permanent contracts for the supply of petroleum products to Ukraine.” The other argument was that Bulgaria’s dependence on Russian crude oil made it economically vulnerable to the embargo and that the deal would reduce fuel prices.
The finance ministry said retail diesel prices fell by more than 20% in the six months after the derogation began, but Vladimirov noted that similar declines had also occurred in other EU countries that did not benefit from such exemptions. The commission did not respond to requests for comment.
There is “absolutely no argument that this derogation is for Bulgaria,” as it has not led to a reduction in fuel prices for consumers, Dobrev said. The refinery can operate without crude oil from Moscow, according to the CSD think tank.
Adding to the controversy is the fact that Lukoil and its subsidiaries supply fuel to Russia’s defense ministry, the Black Sea Fleet and the arms industry, a report by investigative body Proekt said, and its top executive was sanctioned by the United Kingdom and the United States.
Breaking ties
But now Moscow’s influence in Bulgaria is threatened. Despite being a historical ally of Russia, Sofia firmly supports Ukraine in the war – sending weapons and ammunition. Last year, it rejected Kremlin demands to pay for gas in rubles, making Bulgaria the first EU country to be cut off from Russian gas.
Last month, Bulgarian MPs voted to end an agreement that gives Lukoil control over the Rosenets crude oil import terminal. In January, the government said the company would have to start paying local taxes for the first time, with the money going into an energy security fund. But the company has not paid anything since the measure was imposed, according to Dobrev.
“As far as we know, the legislation has not yet entered into force and we have not been informed by the authorities about the amount of this contribution,” Lukoil told Politico. The company added that it has “always fully fulfilled its obligations” regarding Rosenets port “and sees no grounds for its termination”.
Lukoil’s problems are likely to grow after the derogation expires. Dobrev estimates that the exemption has boosted Lukoil’s profits to 2 billion euros in Bulgaria over the past 12 months, with the tax revenue “being used to finance Putin.” But if Sofia fails to get a new derogation, Lukoil’s position in Bulgaria will probably shrink.
“They’re here because they took advantage of big governance gaps and generated a lot of money,” Vladimirov says. “I don’t think Lukoil has an incentive to stay … because it will no longer be able to generate these huge profits.”