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Russian Oil Titan Lukoil Eyes the End of Its Reign in Bulgaria

The Russian energy major has enormous influence in Bulgaria, but its position is under threat.

Russia’s largest private oil company Lukoil casts an immense economic and political shadow over Bulgaria — but the energy major’s privileged position in the Balkan country is in growing danger.

That’s because a derogation from EU oil sanctions enjoyed by its Bulgarian branch runs out at the end of next year, ending the company’s unique, and very profitable, position of being able to supply its sprawling Neftochim refinery in the Black Sea port city of Burgas with its own cheap crude.

The future for the refinery “will be a story of decline,” said Viktor Katona, lead crude analyst for market intelligence firm Kpler.

If the refinery’s operations are threatened, the government is ready to take it over “if necessary,” Bulgarian Defense Minister Todor Tagarev told POLITICO in June. “This is an issue that can be solved.”

A Balkan behemoth

For now Lukoil bestrides Bulgaria.

It imports 3 million barrels of Russian oil a month, according to Kpler, making Bulgaria the world’s fourth-largest buyer of Moscow’s crude after India, China and Turkey. Neftochim — its imposing chimneys visible from 10 kilometers away — provides 80 percent of Bulgaria’s diesel and gasoline needs and accounts for a 10th of the country’s GDP.

The refinery is “very important because it’s the biggest work provider and is giving the best salaries” in the region, said Burgas Mayor Dimitar Nikolov. Together with the nearby Rosenets oil import terminal, the facilities employ 5,000 people.

“For me as a mayor it’s important for the refinery to be functioning because it’s part of the economic security of the city,” he said, adding that closing it would be “unthinkable.” 

That economic and energy footprint means political clout.

“In Bulgaria, there is a Lukoil coalition that forms right after the start of every parliament,” said Delyan Dobrev, the chair of the energy committee in Bulgaria’s parliament who has been leading efforts to rein in Lukoil. He has filed 18 proposals over the last year to curb the company’s influence, but most have floundered.

Lukoil has “been able to translate its economic footprint into outsized political leverage” by financing media and parties, said Martin Vladimirov, an expert at the Center for the Study of Democracy. “Its influence over the Bulgarian political and economic elite is enormous.”

That sway is “so major” partly because “the Bulgarian state is incapable of crisis managing the possible sudden shutdown of crude oil supplies from Russia,” said Ilian Vassilev, Bulgaria’s former ambassador to Russia now working as an analyst.

Historically, Lukoil has relied on local pro-Russian media for support, as well as politicians it influences via local intermediaries like wholesale fuel buyers, Vassilev said.

Responding to the allegations, the Moscow-based firm pointed POLITICO to a recent statement where it “denies any accusations of political engagement.”

Lobbying effort

Bulgaria’s dependence on Russian crude was among the reasons the country lobbied hard for an exemption to EU sanctions against Russian oil imports — an effort supported across the political spectrum, including by reformist Prime Minister Kiril Petkov.

Last year, Sofia got the EU’s only derogation for seaborne crude imports, while several countries were allowed to continue buying pipeline oil for a limited time.

The point man in the EU talks was Finance Minister Asen Vasilev, who threatened to veto the oil sanctions package unless Sofia got an exemption. Bulgaria’s finance ministry denied Vasilev had lobbied on behalf of Lukoil.

The ministry said a key justification used by Vasilev in securing Bulgaria’s derogation was that Lukoil’s refinery was selling fuel to Ukraine.

Petkov previously told Die Welt, a sister publication of POLITICO, that fuel produced in Neftochim was sent to Kyiv, allegedly supplying more than a third of Ukraine’s fuel needs at the start of the war last year.

Lukoil told POLITICO it is an “international privately-owned company with no state stake” and denied having “standing contracts for supplying oil products to Ukraine.”

The other argument was that Bulgaria’s reliance on Russian crude made it economically vulnerable to an embargo, and that the deal would lower fuel prices.

The finance ministry said retail diesel prices fell more than 20 percent in the six months after Bulgaria’s derogation began, but Vladimirov noted similar drops happened in other EU countries without such exemptions.

The Commission didn’t respond to requests for comment.

There is “absolutely not a single argument for having that derogation for Bulgaria” since it hasn’t caused fuel prices to fall for consumers, Dobrev said. The refinery can also operate without Moscow’s crude, according to the CSD think tank.

Adding to the controversy, Lukoil and its subsidiaries supply fuel to Russia’s defense ministry, its Black Sea fleet and arms industry, a report by investigative outlet Proekt found this month, while its top executive has faced U.K. and U.S. sanctions.

Breaking ties

But Moscow’s influence in Bulgaria is under threat.

Despite being a historic Russian ally, Sofia is strongly backing Ukraine in the war — sending weapons and ammunition. Last year, it rejected Kremlin demands to pay for gas imports in rubles, making Bulgaria the first EU country to be cut off from Russian deliveries.

Last month, Bulgarian MPs voted to end an agreement that gave Lukoil control of Burgas’ Rosenets crude import terminal. This week, the government said it aimed to work out how to transition Lukoil’s refinery to process non-Russian oil.

In January, the government said the firm would have to start paying local taxes for the first time, with the money going to an energy security fund. But the firm hasn’t paid anything since this measure was imposed, according to Dobrev.

Lukoil told POLITICO: “As far as we are aware, the legislation hasn’t yet entered into force, and we have not been informed by the authorities as regards the amount of that contribution.” 

The firm added it “has always executed in full its responsibilities” as regards the Rosenets port “and sees no grounds for its termination.”

Lukoil’s troubles are likely to grow once the derogation expires.

Dobrev estimates that the exemption led to Lukoil’s profits spiking to €2 billion in Bulgaria over the past 12 months, with the tax revenue “used to finance [Russian President Vladimir] Putin’s regime.”

But unless Sofia manages to get another derogation, Lukoil’s position in Bulgaria is likely to shrivel.

“They’re here because they took advantage of major governance loopholes and they were generating a lot of money,” said Vladimirov. “I don’t think Lukoil has an incentive to stay … because they won’t be able to generate these huge profits anymore.”

Source : Politico