In the past few months a contentious topic in Bulgaria has been whether to extend or cancel the Russian import oil derogation. Bulgaria had been given permission to import Russian oil until 2024, while other EU member states complied with the imposed oil sanctions. This compromise was agreed on the basis that Bulgarian consumers and economy might struggle if the embargo kicked in straightaway. Bulgaria has been heavily dependent on Russian imports which are then refined in the Russian-owned Lukoil Bulgaria refinery Neftochim.
Earlier this month the debate widened and became a central issue in European media after Politico published an article blaming Bulgaria for directly funding Moscow's war effort. The article made the following claims: "The Kremlin raked in an extra €1 billion for its war effort this year after Russia's largest private oil firm exploited loopholes in EU sanctions rules - with help from Bulgaria. Taking advantage of a unique exemption to the EU's Russian oil ban, Bulgaria allowed millions of barrels of Russian oil to reach a local Russian-owned refinery, which then exported various refined fuels abroad including to EU countries."
All of this sparked an immediate parliamentary debate, and energy experts and political demagogues dominated the air waves. Most importantly, it provoked some politicians to claim that Bulgaria should immediately get rid of the derogation - even when such an action should not be taken lightly. And it generally opened the door for a discussion on whether Bulgaria truly needs the derogation, how local oil players benefit from the circumstances and who is paying the price.
The most important part of the whole discussion is when Bulgaria can let the Russian oil go and at what price.
Prime Minister Nikolay Denkov believes that the derogation of Russian oil disbanding must happen incrementally, and cited the earliest possible date of March 1, a position generally supported by WCC-DB and the government. He reaffirmed this position following an alternative proposal from MP Delyan Dobrev from GERB and Magnitskyi-sanctioned MP Delyan Peevski from the MRF. They proposed that the termination of the derogation should happen in three days and be implemented immediately. The proposal, however, did not pass the energy committee at first reading, and a meeting of the Security Council followed, which today confirmed the risks for consumers if such a hasty maneuver were undertaken. Also, the GERB and MRF proposal could be attacked on the premise that it does not take into account the market situation but rather has the aim of courting Western approval.
"The oil replacement must happen in stages, because otherwise technological risks of blockages, explosions, fires and other accidents could occur," warned the Prime Minister. The terms stipulate that the refinery should switch to non-Russian raw material after December 31, 2023, and also state that not more than 50% will be replaced. After January 31, 2024 - there would be a maximum of 25%, and from the beginning of March switch to entirely non-Russian oil.
The previous timelines, published in October in the State Gazette, provided for this to happen again incrementally, but by October 2024. With the shorter deadline, risks increase," said Denkov.
According to Capital sources a few months ago, the industry calculated that they would buy 100 dollars per ton above from outside, or about 20 cents per liter of more expensive fuel if the derogation is terminated. Such a development is, of course, very positive for the other market participants, who since the beginning of the war have been complaining about low margins on the domestic market, and the impossibility of importing into the country due to the lower prices of "Lukoil" compared to neighboring countries.
Exports to Ukraine represented an opportunity for them to make better margins, but suffered dramatically after the Ukrainian services blacklisted a number of local players, and since the beginning of November, the most serious exporter - the Belozem base of "Insa" oil" by Georgi Samuilov. Since the beginning of the war, according to information from the industry, it has imported quantities of gas oil and diesel from Russia, and the gas oil, after passing through the Belozem desulfurization plant, is refined into diesel and exported to Ukraine.
What comes around goes around
The problems for the refinery in Burgas will begin on January 1, 2024, if it does not switch to non-Russian oil. This is the inevitable result of the agreement reached between GERB, MRF and WCC-DB for the derogation for Russian oil and the statements of Desislava Atanasova and Temenuzhka Petkov from GERB, Yordan Tsonev from MRF and Minister of Finance Assen Vassilev.
Although the suspension of Russian oil to Burgas (the termination of the derogation) must happen by March 1st, as was the last proposal of the Prime Minister Nikolay Denkov, after the latest talks it is clear that the export of certain products from the refinery must conclude by the beginning of next year.
We are talking about products for which there is no internal market in the country, hence if they are not exported, the warehouses would fill up, and the refinery would cease operating. Their export was allowed in certain quota quantities during the caretaker cabinet. Lukoil Neftohim Burgas explicitly insisted on this as a necessary condition for the enterprise to operate.
According to Lukoil Neftohim Burgas the decision of the politicians is tantamount to canceling the derogation from December 2023. "The lack of an opportunity to export these products will lead to a rapid overflow of the refinery's warehouses, and this - to a forced stoppage of production. This may put the Burgas refinery in conditions of increased technological and logistical risk and threaten the supply of fuels for the Bulgarian market," the company's statement reads.
For consumers, assuming that the refinery switches quickly to some sort of non-Russian oil, this may mean an increase in fuel prices from January 1, which will also occur with additional imports of products based on the currently unclear capacity at which the refinery will operate from January. If the refinery shuts down abruptly, this could mean shortages at gas stations and price speculation, at least in the first months.