Perhaps it's cynical to admit it but it's a sad truth that war can prove lucrative for certain individuals and states. Bulgarian fuel traders are an example; last year they managed to export to Ukraine production for a record 1.7 billion BGN, or 15 times more than in 2021. However, the market disruption, triggered by the low prices of Russian raw materials and the shortage of diesel in the region, is unlikely to happen again this year.
Why is this? Fact is, Bulgaria has been losing its market share in recent months. Statistical data on fuel exports to Ukraine shows a decline in December and in January. According to market insiders, this trend became even stronger in February and March although statistics are yet to be published for these months.
Losing the Ukrainian market happened for various diverse reasons: the war ripped apart the Ukrainian economy and demand for fuels decreased; in any case the country was already overstocked with fuel. Meanwhile, other exporters, such as Turkey, lowered their prices and demand for non-Russian fuels has increased. And, lastly, there is the investigation that began in Moscow against the Russian Lukoil, after the chairman of the Russian Duma, Vyacheslav Volodin, assigned the security and anti-corruption commission and the energy commission to investigate the information on the supply of fuel to Ukraine by of the Bulgarian refinery of Lukoil in Burgas.
Start to finish
The export of fuel from Bulgaria to Ukraine began in a completely logical and market-oriented way - there was a shortage of diesel in neighboring Romania, and therefore, at the beginning of the war, Bulgarian traders received many inquiries from Ukrainian buyers. Meanwhile, the pricing policy of Lukoil Bulgaria made the domestic market unattractive in terms of margins for local players.
Bulgarian players' better wholesale price paved the way for major profit-makings. Being exempted from the EU sanctions list (to cover the fuel needs of Ukrainian farmers), the export of diesel from Bulgaria to Ukraine was legally allowed to continue until the end of 2024.
Thus, 2022 turned out to be a record year for fuel exports to Ukraine - both in terms of quantities and amounts. Sales were carried out by Bulgarian companies - storekeepers and exporters, who bought fuel on the local market from wholesaler Lukoil Bulgaria and then resold it. Independent players also imported diesel from Russia through local traders and took advantage of the Ukrainian market. Such was the case with Plovdiv-based Insa Oil of Bulgarian businessman Georgi Samuilov, the largest exporter based on volumes according to market data.
An NSI report for the entire 2022 shows that Ukraine has become the second largest export destination for Bulgaria outside the EU after Turkey. For the whole of 2022, exports to the war-torn country amount to BGN 2.25 billion, which is an increase of 183% on an annual basis. Of this amount, two-thirds are fuel sales - a total of almost BGN 1.7 billion, of which over 80% or BGN 1.4 billion are diesel exports. The strongest month for Bulgarian fuel traders was November.
The beginning of the end
According to local players, there are several reasons for the sharp drop in demand for Bulgarian fuels. The first stems from the collapse of the Ukrainian economy - according to preliminary data from the Ukrainian Ministry of Economy, the country's GDP shrank by about 30% last year. Another factor is falling fuel prices on international markets since the beginning of this year, since all traders - including from Turkey, Hungary and Poland - started selling there. This has led to an oversupply on the Ukrainian market and a glut that coincides with the economic slowdown.
Separately, following publications in Russian media that fuels produced in Burgas's Lukoil refinery are traveling to Ukraine, the wholesale price of Lukoil fuels has risen. Since the beginning of the year, the premium/surcharge per ton for diesel has doubled, the market commented. However, not all traders see the Kremlin's hand - they explain the price change by citing Lukoil's usual delayed price adjustments after the change in international quotations. Thus, when the market goes down, Burgas's fuels remain more expensive for a certain period.
However, the result is unequivocal for everyone. The price advantage once enjoyed by Bulgarian fuel exporting companies is now gone. Meanwhile, alternative suppliers who unload at the fuel terminal at the Romanian port of Constanta have become much more competitive. With prices of petroleum products leveling out, Bulgarian companies have higher logistics costs. So Turkish exporters are currently in a stronger position, as well as suppliers from Poland, for example.
At the same time, the market reports that the quantities that Georgi Samuilov receives from Russia have also decreased. And in particular - supplies from companies with state participation such as Lukoil's competitor - Gazprom Neft.
According to Bulgarian companies, Ukrainians have become more selective in terms of the origin of fuels and large traders have started looking for non-Russian goods.
After the large oversupply on the Ukrainian market with fuels from the Burgas refinery, the Bulgarian manufacturer has started to reduce its production, the industry claims, talking about a drop of 30-35%. This also could be confirmed by the report of the Ministry of Finance on the implementation of the budget as of March. It states that "since the beginning of 2023, a decrease of 10.3% has been reported in the quantities of goods imported from third countries, including a decrease in the quantities of imported crude oil".
Lukoil's Bulgarian entities also have new management. The old one was replaced after the tenth package of European sanctions, which imposed a ban on Russian citizens from participating in the management of critical European infrastructure, as well as retaining volumes in European gas storage facilities.
Since Bulgaria is yet to diversify its fuel imports, the benefits for the Bulgarian state of the two-year moratorium on the import of Russian fuels and oil, given by Brussels, could be calculated mainly on the basis of excess profits. Economy Minister Nikola Stoyanov announced that at the end of March, the state expects the oil refinery in Burgas to pay a new excess profit tax of about BGN 90 million. At the end of 2022, the Burgas refinery contributed BGN 73 million from the additional taxation with 33% of the excess profit in 2022.